As filed with the Securities and Exchange Commission on October 26, 1999
Registration No. 333-87325
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OFFICIAL PAYMENTS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 7374 52-2190781
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
(925) 855-5000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Thomas R. Evans
Chief Executive Officer
445 Park Avenue, 10th Floor
New York, New York 10022
(917) 322-2540
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Dennis J. Block, Esq. Daniel Clivner, Esq.
Cadwalader, Wickersham & Taft Simpson Thacher & Bartlett
100 Maiden Lane
New York, New York 10038 10 Universal City Plaza, Suite 852
(212) 504-6000 Universal City, California 91608
(818) 755-7000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee
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Common Stock, par value
$0.01 per share....... 5,750,000 shares $15.00 $86,250,000 $23,978(3)
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(1) Includes 750,000 shares subject to an over-allotment option granted to the
underwriters by us. See "Underwriting."
(2) Estimated solely for purposes of computing the registration fee pursuant
to Rule 457(o).
(3) Of this fee, $16,680 was paid upon the first filing of the registration
statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION-- , 1999
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Prospectus
, 1999
OFFICIAL PAYMENTS CORPORATION
5,000,000 Shares of Common Stock
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The Offering:
Symbol & Market:
. OPAY/Nasdaq National. We are offering
Market 5,000,000 shares of
our common stock.
. We have granted the
underwriters an
option to purchase
up to an additional
750,000 shares from
us to cover over-
allotments.
. This is our initial
public offering, and
no public market
currently exists for
our shares. We
anticipate that the
initial public
offering price will
be between $13.00
and $15.00 per
share.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to us:
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
CIBC World Markets
DLJdirect Inc.
[Inside Front Cover Artwork]
TABLE OF CONTENTS
Page
Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-Looking Statements.......... 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 33
Management.......................... 49
Page
Certain Relationships and Related
Transactions....................... 57
Principal Stockholders.............. 59
Description of Capital Stock........ 61
Shares Eligible for Future Sale..... 63
Underwriting........................ 65
Legal Matters....................... 67
Experts............................. 67
About this Prospectus............... 67
Where You Can Find Additional
Information........................ 67
Index to Financial Statements ...... F-1
i
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. We urge you to read the entire prospectus carefully.
SUMMARY
Our Business
We believe we are the leading provider of electronic payment options to
government entities enabling consumers to use their credit cards to pay, by
telephone or through the Internet, personal federal and state income taxes,
sales and use taxes, property taxes and fines for traffic violations and
parking citations. Our government clients include the IRS, the States of
California and New Jersey, the District of Columbia and approximately 425
municipalities. Our pilot program for personal federal income taxes processed
approximately 45,000 tax payments totaling more than $174 million in payments
to the IRS from January 15, 1999 to April 15, 1999. According to IRS data, we
had a 95% market share, based on dollar volume, for credit card payments of
personal federal income taxes due April 15, 1999. We also processed over
293,000 payments for our state and municipal government clients totaling $82.7
million in the first nine months of 1999.
Our interactive toll-free telephone number, 1-888-2PAY-TAX SM, allows
consumers to make payments and receive certain customer service information. We
began offering payment services through the Internet in August 1999. Our
8882paytax.com Web site currently allows consumers to make payments of property
taxes, business license fees, parking citations and utility bills for two
municipalities. Pursuant to agreements with two states and eight additional
municipalities, we expect to provide the ability to make similar payments and
state income tax payments to those government entities through the Internet by
the end of 1999. We are working with our other government clients, including
the Internal Revenue Service (IRS), to enable consumers to make additional tax
and other payments through the Internet. We are also enhancing our Web site so
that consumers will be able to print receipts, save their personal data to
facilitate future payments, obtain information regarding our services and
access additional tax and other information.
We combine expertise in facilitating credit card transactions, an Internet
focus and targeted marketing techniques to attract both government clients and
consumers to our services. Our services allow our government clients to provide
their constituents with user-friendly electronic payment options at no charge
to the government entity. Consumers who use our payment services pay us a
convenience fee that is added to their payment. We believe that consumers use
our services for the convenience, the payment flexibility and the perquisites
associated with paying by credit card.
We had revenues of $2.4 million in 1998 and $7.2 million in the first nine
months of 1999. We incurred net losses of $325,000 in 1998 and $1.3 million in
the first nine months of 1999. Our accumulated deficit was $994,000 at December
31, 1998 and $2.3 million at September 30, 1999.
Our Market Opportunity and Solution
In addition to payments made automatically on a taxpayer's behalf, such as
payroll withholding taxes, individuals and small businesses make a variety of
payments to government entities at the federal, state and local levels. Based
on government data and our estimates, federal and state personal income taxes,
state sales and use taxes, local real estate taxes and fines for traffic
violations and parking citations total $670 billion annually.
We believe our electronic payment solutions are attractive to government
entities because they provide an added service to consumers while reducing
paperwork and encouraging the electronic filing of tax forms. Our services
address the IRS' publicly-stated goal to substantially increase taxpayer access
to electronic filing, payment, and communication products and services. Many
government entities lack the expertise, technical
1
personnel and economies of scale to cost-effectively implement and maintain the
hardware and software necessary to accept credit card payments from consumers
by telephone or through the Internet. Our services are designed to work with
their existing information systems, require minimal implementation and are
provided at no cost to government entities.
Individuals and small businesses who utilize a particular payment service
can be grouped into user communities, distinguished by specific demographics
and psychographics, that may utilize related products and services. For
example, we may be able to facilitate the sale of consulting or other related
services to small businesses that use our services to pay sales taxes, or the
sale of automobile insurance or online driving school services to consumers
paying fines for traffic violations.
Our Strategy
Our goal is to continue to be the leading provider of, and further develop
the market for, electronic payment services using credit cards to pay
government obligations. The following are key elements of our strategy:
. Expand and enhance our service offerings for personal federal income tax
payments. For the 1998 tax year, we processed only balance-due personal
federal income tax payments. By early 2000, we expect to also process
personal estimated and extension tax payments.
. Obtain additional state and municipal clients. We currently provide our
credit card payment services to the States of California and New Jersey,
the District of Columbia and approximately 425 municipal government
clients. We are focusing on establishing relationships with additional
states and municipalities by leveraging our existing relationships with
the IRS and other clients.
. Continue the roll-out of our Internet services. Within the next 6 to 12
months, we expect to offer our existing government clients the option to
add Internet payments services while new clients will have the option to
sign up for both Internet and interactive telephone payment services.
. Broaden our payment service offerings. We expect to expand our services
to include solutions for personal state estimated and extension income
tax payments, corporate taxes and fees, public university tuition and
building permit fees.
. Cross-sell related services to small business and individual users. By
grouping consumers according to the type of payments they make, we
intend to target distinct groups of users to cross-sell related products
and services.
. Increase brand awareness and consumer usage. We have relied on our
government clients and credit card issuers, and will continue to work
with them, to publicize our services through government publications and
credit card billing and promotional inserts. In addition, we intend to
advertise directly in order to publicize our services.
. Pursue strategic relationships and acquisitions to reach additional
consumers and provide related services.
2
General Information
We are located on the Internet at www.8882paytax.com. Our executive offices
are located at 2333 San Ramon Valley Boulevard, Suite 450, San Ramon,
California 94583 and our telephone number is 925-855-5000. We changed our name
from U.S. Audiotex Corporation on October 20, 1999.
----------------
References in this prospectus to a particular income tax year mean taxes for
that calendar year due in April of the next calendar year.
Unless otherwise indicated, all share and per share information in this
prospectus:
. Assumes that the underwriters will not exercise their over-allotment
option; and
. Reflects the merger of U.S. Audiotex, LLC into us, which was effective
as of September 30, 1999.
The Offering
Common stock offered............. 5,000,000 shares
Common stock to be outstanding
after this offering............. 20,000,000 shares
Use of proceeds.................. We intend to use the net proceeds of this offering,
which are estimated to be approximately $63.0 million
. to repay the outstanding balance of promissory
notes, evidencing advances made to us by our
stockholders and
. for working capital and general corporate purposes.
For a more detailed discussion of the advances made to
us by our stockholders, please see "Use of Proceeds" on
page 16 and "Certain Relationships and Related
Transactions" on page 57.
Proposed Nasdaq National Market
symbol.......................... OPAY
Unless otherwise indicated, this prospectus reflects a 3-for-1 stock split
as of October 26, 1999, and assumes that the underwriters do not exercise the
option granted by us to purchase additional shares in the offering to cover
over-allotments.
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of October 26, 1999, and excludes:
. 4,488,012 shares of common stock issuable upon exercise of options that
have been granted under our 1999 Stock Incentive Plan at an exercise
price of $1.33 per share;
. 2,411,988 shares of common stock reserved as of October 26, 1999 for
issuance under our 1999 Stock Incentive Plan.
For a more detailed description of our capitalization, please see
"Capitalization" on page 17.
3
Summary Financial Data
You should read the following summary financial data in conjunction with
"Selected Financial Data" on page 19 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 20 and our audited
financial statements and the related notes included elsewhere in this
prospectus.
Year Ended Nine Months
December 31, Ended September 30,
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1996(1) 1997 1998 1998(2) 1999(2)
(In thousands, except per share data)
Statements of Operations
Data:
Total revenues........... $ 786 $1,202 $2,369 $ 1,434 $ 7,208
Total cost of revenues... 305 696 1,080 606 5,427
------ ------ ------ --------- ----------
Gross profit............. 481 506 1,289 828 1,781
Operating expenses....... 766 1,002 1,559 1,099 3,042
------ ------ ------ --------- ----------
Income (loss) from
operations.............. (285) (496) (270) (271) (1,261)
------ ------ ------ --------- ----------
Net income (loss)........ $ (323) $ (502) $ (325) $ (308) $ (1,290)
====== ====== ====== ========= ==========
Basic and diluted net
income (loss) per
share:.................. $(0.01)(/3/) $(0.03) $(0.02) $ (0.02) $ (0.09)
====== ====== ====== ========= ==========
Shares used in computing
basic and diluted
net income (loss) per
share:.................. 5,000 5,000 5,000 5,000 5,000
====== ====== ====== ========= ==========
September 30, 1999
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Actual As Adjusted(4)
Balance Sheet Data:
Cash and cash equivalents............................... $ 514 $61,681
Working capital (deficit)............................... (1,050) 61,799
Total assets............................................ 206 63,228
Total debt including current portion.................... 1,946 113
Stockholders' equity ................................... (472) 65,528
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(1) Includes the results of operations of the predecessor company for the
period from January 1, 1996 to June 26, 1996.
(2) September 30, 1998 and 1999 information is derived from our unaudited
financial statements.
(3) Basic and diluted net income (loss) per share excludes net income (loss) of
$(156,000) of the predecessor company.
(4) Reflects (a) the issuance and sale of shares of common stock in this
offering at an assumed initial offering price of $14.00 per share (the
midpoint of the range set forth on the cover page of this prospectus), and
(b) the use of the net proceeds from this offering as described in "Use of
Proceeds" on page 16. See "Certain Relationships and Related Transactions"
on page 57 and Note 2 to our financial statements.
4
RISK FACTORS
Before you invest in our common stock, you should be aware of various risks,
including those risks described in the risk factors below. You should carefully
consider these risk factors, together with all of the other information
included in this prospectus, before you decide whether to purchase shares of
our common stock. You should keep these risk factors in mind when you read
forward-looking statements elsewhere in this prospectus. Any or all of these
risks could have a material adverse effect on our business, operating results
and financial condition.
Risks Related to Our Business
We have a history of losses and expect to continue to incur losses.
We have incurred net losses of approximately $2.3 million for the period
from our inception on June 26, 1996 to September 30, 1999. We expect to incur
losses from operations for the foreseeable future. We cannot assure you that we
will become or remain profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 20.
In addition, in the third quarter of 1999 we recorded on our balance sheet a
deferred stock compensation expense totaling $41.2 million. This expense
consists of an amount of $10.0 million, representing the minimum value of the
options, guaranteed by Imperial Bank, granted to Thomas R. Evans, our Chairman
and Chief Executive Officer, and an amount of $31.2 million, representing the
difference between the estimated value of the common stock underlying options
we granted to certain of our other officers and employees and the exercise
price of those options. The total amount of this expense may increase as a
result of additional options that we will grant concurrent with the completion
of this offering. The $10.0 million expense related to Mr. Evans' options and
$27.0 million of expense related to options granted to our other officers will
be amortized, using a straight-line method, over a three-year period, starting
in the third quarter of 1999. The remaining $4.2 million of expenses related to
options granted to our other employees will be expensed upon completion of this
offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" on page 20, "Management--1999 Stock Incentive
Plan" on page 53 and "--Employment Agreements" on page 55 and Note 8 to our
financial statements.
We intend to expend significant resources on increasing our sales and
marketing staff and capabilities and systems development. As a result, we will
need to significantly increase our revenues to achieve and maintain
profitability. We cannot assure you that we will be able to achieve the
necessary revenue growth. If our revenues do not increase sufficiently, our
operating results and financial condition could be materially and adversely
affected.
Because our business model is unproven and evolving, it is difficult to
evaluate our business.
The use of credit cards to make payments to government agencies is
relatively new and evolving. To date, our business has consisted primarily of
providing credit card payment options for the payment of balance-due federal
and state personal income taxes, property taxes, and fines for traffic
violations and parking citations. Because we have only a limited operating
history, it is difficult to evaluate our business and prospects and the risks,
expenses and difficulties that we may face in implementing our business model.
Our success will depend on maintaining our relationship with the IRS and on
developing additional relationships with state and local government agencies,
especially state taxing authorities, and their respective constituents. We
cannot assure you that we will be able to develop new relationships or maintain
existing relationships, and our failure to do so could have a material and
adverse effect on our business, operating results and financial condition.
Our future growth depends on the acceptance of our payment systems as a method
for making payments to government entities.
We work with government entities to allow us to provide credit card payment
services to their constituents. While many government entities have initiatives
or legislative mandates in place to foster the
5
growth of electronic payments, our business, operating results and financial
condition would suffer if there were a reduction in these initiatives.
Traditionally, individuals and small businesses have made substantially all
payments to government entities by check or money order. We are providing our
payment services through our interactive telephone conduit and have developed
and will continue to expand the availability of our Internet conduit. However,
we cannot assure you that we will be successful in attracting enough additional
consumers to use our interactive telephone and Internet conduits to make their
payments to our government clients. The lack of meaningful growth in the market
for credit card payments to government entities could have a material adverse
effect on our business, operating results and financial condition.
If consumers are unwilling to pay convenience fees for our services, our
business model will fail.
Our business model is based on consumers' willingness to pay a convenience
fee in addition to their required government payment in order to use our credit
card payment option. If consumers are not receptive to paying a convenience
fee, demand for our services will decline or fail to grow, which could
jeopardize the implementation of our business plan and would have a material
and adverse effect on our business, operating results and financial condition.
If credit card associations change their rules and do not allow us to charge
convenience fees, our operating results would be materially and adversely
affected.
Credit card association rules governing the use of Visa(R) and MasterCard(R)
at merchant locations generally prohibit merchants from charging a convenience
fee for cardholder purchases. We and Imperial Bank, our majority stockholder,
have worked with these credit card associations to permit convenience fees for
credit card payments for government services and taxes. We cannot assure you
that credit card association rules will continue to allow us to charge
convenience fees. To date, Visa(R) permits a convenience fee but only if it is
a flat amount for a particular government service and will not allow fees that
are variable in amount depending on the kind of service provided or the amount
involved. If our ability to charge convenience fees is limited or eliminated,
our business, operating results and financial condition would be materially and
adversely affected.
The IRS currently accounts for 60% of our revenues, and the loss of the IRS as
a client would materially and adversely impact our operating results.
In the first nine months of 1999, convenience fees from payments to the IRS
accounted for approximately 60% of our total revenues. For the 2000 tax year,
we will be required to respond to an IRS request for proposal for electronic
payment services for us to continue to provide our services. We expect that the
IRS will select one or more electronic payment service providers for the 2000
tax year within the next several months. If the IRS does not accept our
proposal, our business, operating results and financial condition would be
materially and adversely affected.
Most of our contracts with government clients are not exclusive or long-term
contracts and, as a result, large government clients may terminate their
relationships with us on short notice.
Most of our agreements with government clients are non-exclusive, short-term
contracts or memoranda of understanding and can be terminated without cause on
short notice, generally 30 to 90 days. In addition, a government client may
choose not to renew its contract with us or may not choose our proposal in
response to a government request for proposal. If one of our larger existing
government clients chooses to terminate its contract or memorandum of
understanding with us, or does not choose our proposal, our business, operating
results and financial condition could be materially and adversely affected.
Increased competition in the market for payment services to government entities
could result in lower operating margins and decreased market share.
Our credit card payment services face competitive pressures from various
card issuing banks for Visa(R) and MasterCard(R), which send out checks that
function as cash advances and can be used for payments to
6
government entities. In addition, a number of data and bill processing
companies have the technical capability and other resources to commence
providing credit card payment services, and have indicated an intent to do so.
Increased competition from other providers of payment options to government
entities could have a material and adverse effect on our business, operating
results and financial condition.
Many of our current and potential competitors have significantly greater
financial, marketing, technical, sales, and customer support and other
resources than we do. In addition, some of these competitors may be able to
devote greater resources to the development, promotion and sale of their
services, adopt more aggressive pricing strategies and devote substantially
more resources to the development of technology and systems than we will be
able to devote or adopt. Increased competition may result in lower operating
margins and loss of market share. We may not be able to compete successfully
against current and future competitors, and competitive pressures could have a
material and adverse effect on our business, operating results and financial
condition.
If our services do not function as designed, we may incur significant liability
for the processing of fraudulent or erroneous transactions.
Our electronic payment services are designed to provide payment management
functions and to limit our government clients' risk of fraud or loss in
effecting transactions with their constituents. As electronic services become
more critical to our government clients, there is the potential for significant
liability claims for the processing of fraudulent or erroneous transactions. In
addition, defects or programming errors in the software we use could cause
service interruptions. Our services depend on complex software that is both
internally developed and licensed from third parties. Although we conduct
extensive testing, complex software may contain defects or programming errors,
or may not properly interface with third party systems, particularly when first
introduced or when new versions are released. We encountered an incident where
a date coding error in a pilot program resulted in approximately 13,700
transactions being posted for tax year 1999 rather than 1998, which required
reposting by the IRS to the correct year. In addition, duplicate transactions
by consumers and processing errors by the Company during April 1999 resulted in
duplicate payments to the IRS. To the extent that defects or errors are
undetected in the future and cannot be resolved satisfactorily or in a timely
manner, our business could suffer. If a liability claim or claims were brought
against us, even if not successful, their defense would likely be time-
consuming and costly and could damage our reputation. Any such liability or
claim could have a material and adverse effect on our business, operating
results and financial condition.
If our system security is breached, we may be liable to government clients and
consumer users for damages resulting from the breach.
Our failure to prevent system security breaches could have a material and
adverse effect on our business, operating results and financial condition. A
fundamental requirement for electronic payment services is the secure
transmission of confidential information over public communication networks.
Third parties may attempt to breach our system security or that of our
government clients or consumer users. If they are successful, we may be liable
to our government clients or consumer users for any damages resulting from a
breach in our system security, and any breach could harm our reputation. We may
be required to expend significant capital and other resources to license
additional encryption and other technologies to protect against system security
breaches or to alleviate problems caused by any such breaches.
If our systems fail, we may not be able to provide adequate service, and our
operations could be damaged.
Our success depends on the efficient and uninterrupted operation of our
computer and communications systems. The majority of our computer and
communications systems are located in San Ramon and San Francisco, California.
Our systems and operations are vulnerable to damage or interruption from:
. telecommunication failures;
. power loss;
7
. earthquakes, fires or floods;
. computer viruses;
. physical and electronic break-ins; and
. acts of sabotage, vandalism and similar events.
Any failure of our systems could impede the timely processing of consumer
user payments and other data and the day-to-day management of our business.
Despite any precautions we take, a natural disaster or other unanticipated
problem that leads to the corruption or loss of data at our facilities could
result in an interruption of our services. Service interruptions could have a
material and adverse effect on our reputation, business, operating results and
financial condition and would have a significant adverse effect if they
occurred on or near April 15.
A constraint in our capacity to process transactions could impair the quality
and availability of our service.
Capacity constraints may cause unanticipated system disruptions, impair
quality and lower the level of our service, all of which could have a material
and adverse effect on our business, operating results and financial condition.
Although we believe that we have sufficiently expanded our system capacity to
accommodate expected additional personal federal income tax payments and our
other anticipated growth, we cannot assure you that we will not suffer capacity
constraints caused by a sharp increase in the use of our services. Due to the
large number of tax payments made in March and early April, there is an
increased risk that we will suffer a capacity constraint during that period,
which would have an adverse effect on our business, operating results and
financial condition.
If we fail to respond to rapid technological change, our systems and services
could be rendered obsolete.
The electronic payment industry is characterized by rapid technological
change. If we cannot adapt or respond in a cost-effective and timely manner to
technological changes, our business, operating results and financial condition
will be materially and adversely affected, and our technology and systems, and
thus our services, could be rendered obsolete. The development of our
technologies and necessary service enhancements entails significant technical
and business risks and requires substantial lead-time and expenditures. We may
not be able to keep pace with the latest technological developments,
successfully identify and meet the demands of our government clients and
consumer users, use new technologies effectively, or adapt our services to
emerging industry standards or to our government clients' or consumer users'
requirements.
Our operating results may fluctuate significantly from quarter to quarter,
which may negatively impact our stock price.
We believe our quarterly operating results will fluctuate significantly in
the future as a result of a variety of factors, many of which are outside of
our control. These factors include:
. the seasonality of our business, which is due primarily to the fact that
the majority of federal and state personal income tax payments is being
made on or near April 15 and to the fact that property tax payments are
made only once or twice per year in most jurisdictions;
. the amount and timing of costs related to our sales and marketing
efforts and other initiatives; and
. our ability to upgrade, enhance and maintain our systems and
infrastructure in a timely and cost-effective manner.
Because of these factors, we believe that comparisons of our quarterly
operating results are not necessarily meaningful. In addition, it is possible
that in some future quarters our operating results will be below the
expectations of research analysts and investors, in which case the price of our
common stock is likely to decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Fluctuation of
Quarterly Results" on page 30.
8
If government clients and credit card issuers cease to publicize our services,
consumer use of our services may slow, and we would suffer a large increase in
advertising costs.
Currently, our government clients and credit card issuers provide most of
the publicity for our services, without any cost to us. If these entities cease
to publicize our services, or charge us for this publicity, our advertising
costs will increase substantially, which could have a material and adverse
effect on our business, operating results and financial condition. Our
government clients and credit card issuers have no obligation to continue to
provide this publicity, and we cannot assure you that they will continue to do
so. In addition, the government clients may publicize other services, including
those of our competitors.
If we do not expand our sales and marketing and other staff and capabilities or
effectively manage our internal growth, we may not be able to expand our
business.
We are currently experiencing a period of rapid expansion. In order to
manage our expected growth, accommodate our needs and take advantage of new
opportunities in our market, we will need to attract additional key personnel
in the near future. We also will need to expand our sales and marketing,
technical, finance, administrative, systems and operations staff. This
expansion involves a number of risks, including:
. our ability to hire and retain qualified personnel in a competitive
environment; and
. our ability to successfully integrate new personnel with our existing
personnel.
We cannot assure you that our current and planned personnel levels, systems,
procedures and controls will be adequate to support our future operations. If
inadequate, we may not be able to exploit existing and potential strategic
relationships and market opportunities. Any delays or difficulties we encounter
could impair our ability to attract new, and enhance our relationships with
existing government clients and consumer users. If we are unsuccessful in
hiring, integrating and retaining new personnel, or unable to effectively
manage our internal growth, our business, operating results and financial
condition could be materially and adversely affected.
A number of members of our management team have little experience working
together; we depend on a few key employees.
Our future success will depend upon the continued service of key management
and technical personnel. Thomas Evans, our Chairman and Chief Executive
Officer, joined us in August 1999. Given his limited experience with our
business and other members of management, it is possible that Mr. Evans may not
integrate well into our business. The failure of key personnel to integrate
well would have a material and adverse effect on our business, operating
results and financial condition.
We currently do not maintain key man life insurance policies on any of our
employees. The loss of the services of any of our key employees or our
inability to hire and retain additional key employees would have a material and
adverse effect on our business, operating results and financial condition.
If we do not adequately address year 2000 issues, we may incur significant
costs, which could negatively impact our operating results.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many of these computer systems and software products may need to be
upgraded or replaced in order to correctly process dates beginning in 2000. The
failure to correct any year 2000 issues in the software and computer systems
used for our services could materially and adversely affect our business,
operating results and financial condition.
9
We rely on interfacing with computer hardware and software provided by third
parties that may not be year 2000 compliant. Currently, these third parties
primarily consist of our government clients. For many of these government
clients, we have installed our systems onto their computer networks. As our
Internet roll-out continues, these third parties will include our consumer
users, who will access our services through their own computer systems. The
failure of third party hardware or software to properly process dates for the
year 2000 and any failure by these third parties to resolve any year 2000
issues they may have could cause us to incur unanticipated expenses. These
expenses could have a material adverse effect on our business, operating
results and financial condition.
We believe that we have identified substantially all local installations at
our government clients' sites that require remediation to be year 2000
compliant. We are currently remediating those identified local installations.
If we are unable to properly remediate all local installations requiring
remediation, or complete such remediation in a timely manner, our government
clients will experience year 2000 problems, which could expose us to liability
and damage our reputation and result in a material and adverse effect on our
business, operating results and financial condition.
Additionally, to the extent that year 2000 issues have a negative impact on
consumer users and undermine the public's faith in the Internet as a medium for
the exchange of information and commerce, growth of Internet commerce could
slow, which in turn could materially and adversely affect our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness" on page 31.
We may not be able to protect our intellectual property rights, which may
result in damages to us; or we may infringe on the rights of others, which may
subject us to liability for damages caused to third parties.
We protect our intellectual property rights through a combination of
trademark, service mark, copyright and trade secrets laws. We cannot assure
you, however, that the steps we have taken to protect our intellectual property
rights will be adequate to deter misappropriation of those rights. We do not
have any proprietary technology or patent protections. In addition, we cannot
be certain that our services do not infringe on valid patents, copyrights and
intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the intellectual property
rights of third parties. Intellectual property litigation is expensive and
time-consuming and could divert our management's attention away from running
our business.
We may not be able to license technologies, including Web server and encryption
technologies, from third parties on favorable terms, and we may not be able to
utilize these technologies successfully.
We intend to continue to license technology from third parties, including
our Web server and encryption technology. Our business is evolving, and we may
need to license additional technologies to remain competitive or adequately
protect the security of our systems. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our services. These
third party licenses may fail to generate revenues sufficient to offset
associated acquisition and maintenance costs, or may divert our resources from
the development of our own proprietary technology. Our inability to obtain any
of these licenses could delay product and service development until equivalent
technology can be identified, licensed and integrated. Any such delays in
services could cause our business and operating results to suffer.
We substantially depend on Imperial Bank's sponsorship to maintain our status
as a credit card member service provider or certified processor; and our status
in each credit card association could be suspended or terminated if we cannot
comply with standards or if the associations change their membership rules.
Termination of our member service provider registrations or our status as a
certified processor of credit cards, or any changes in the rules of the credit
card associations that limit our ability to provide processing and
10
marketing services, could have a material adverse effect on our business,
operating results and financial condition. As a nonbank processor, in order to
process credit card transactions, we must be sponsored by a financial
institution that is a principal member of a credit card association. Through
Imperial Bank, our majority stockholder, we are registered with Visa(R) and
MasterCard(R) as a certified processor and member service provider. See
"Certain Relationships and Related Transactions" on page 57. We are a merchant
agent for American Express(R). Our status in each association and with American
Express(R) depends on our compliance with their standards, which may change and
may vary from association to association, and could be suspended or terminated
if we are unable to comply. We cannot assure you that the credit card
associations will maintain our registrations or keep their current rules in
effect. Additionally, some of the member financial institutions that set the
rules for each credit card association are our or Imperial Bank's competitors,
and may help effect rules that are less favorable to us.
Our failure to successfully integrate any future acquisitions could strain our
managerial, operational and financial resources.
As part of our business strategy, we intend to pursue opportunistic
acquisitions that would provide additional technologies, products, services or
experienced personnel. Acquisitions present a number of potential risks that
could have a material and adverse effect on our business, operating results and
financial condition, including:
. difficulty in assimilating the acquired company's personnel, operations
and technologies;
. entrance into markets in which we have limited or no prior experience;
. the potential loss of key employees of the acquired company;
. the distraction of our management's attention from other business
concerns; and
. the potentially dilutive issuance of our common stock, the use of
significant amounts of cash or the incurrence of substantial amounts of
debt.
Risks Related to Our Industry
If the growth in the use and capacity of the Internet does not continue, or the
Internet is not secure, the growth of our business will be negatively impacted.
The growth of our business would be materially and adversely affected if
Internet usage does not continue to grow rapidly. Internet usage may be
inhibited for a number of reasons, including:
. concerns about the security of confidential information;
. lack of reliability and ease of access;
. lack of cost-effective, high-speed service;
. inconsistent quality and interruption of service;
. inadequate network infrastructure; and
. adoption of onerous laws or governmental regulations.
The Internet infrastructure may not be able to support the demands placed on
it by increased usage and its performance and reliability may decline. Internet
Web sites have experienced interruptions and delays in their service as a
result of outages occurring throughout the Internet network infrastructure. If
these outages or delays occur frequently in the future, Internet usage, as well
as the use of our Internet payment service, could grow more slowly than
projected or decline. In addition, because a number of our services involve the
transfer of confidential information, our business, operating results and
financial condition could be materially and adversely affected if Internet
users significantly reduce their use of the Internet due to security concerns.
11
We may become subject to Federal Reserve Board licensing laws or to expanded
electronic fund transfer rules, which could increase our operating costs and
restrict our business activities.
Our management believes that we are not required to be licensed by the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services. We
cannot assure you that a federal or state agency will not attempt, either now
or in the future, to require that providers of services like ours be licensed.
This would impede our ability to do business in the areas within the
regulator's jurisdiction.
In conducting several aspects of our business, we are subject to various
laws and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code. We are also subject to the electronic fund transfer
rules embodied in Regulation E issued by the Federal Reserve Board. Given the
expansion of the electronic commerce market, it is possible that the Federal
Reserve Board might revise Regulation E or adopt new rules for electronic fund
transfers affecting users other than consumers. It is possible that Congress or
individual states could enact laws regulating the electronic commerce market.
If enacted, these laws, rules and regulations could be imposed on our business
and industry and could have a material and adverse effect on our business,
operating results and financial condition.
Because of Imperial Bank's ownership of our shares, we are subject to federal
and state banking laws, which, if changed, could further restrict our business
activities or increase our operating cost.
We are subject to federal and state banking laws and regulations because of
Imperial Bank's ownership of our stock. In order to allow Imperial Bank to
comply with applicable laws and regulations, we are restricted from entering
into certain business activities. These restrictions limit our discretion in
operating our business. We cannot assure you that the banking laws and
regulations will not be amended, replaced or construed differently, the effect
of which could materially and adversely affect our business, operating results
and financial condition. See "Business--Regulatory Matters" on page 47 and
"Certain Relationships and Related Transactions" on page 57.
If there are changes in tax laws which decrease the amount, the methods or the
frequency of our consumer tax payments, our revenues could decrease.
Congress, as well as individual states and municipalities, regularly
consider a wide array of tax proposals. These tax proposals may result in a
reduction of federal, state or local tax rates, collection of a greater
percentage of taxes through withholding or other changes that could result in a
decrease in the number and amount of payments that consumer users have to make
directly to a government entity. In addition, some of these proposals may
result in taxation of credit card perquisites, such as frequent flyer miles. If
any of these proposals were to be passed, it may reduce the number and amount
of tax payments effected through our services and the dollar amount of our
revenue derived from the convenience fees charged to consumer users. If
enacted, these laws could have a material and adverse effect on our business,
operating results and financial condition.
If there is a general economic downturn, the amount of income tax paid could
decrease, which would reduce our operating results.
Income taxes are dependent on the amount of income earned by tax paying
citizens. A significant economic downturn could reduce the per capita income of
citizens, and thus reduce the amount of income tax payments consumer users have
to make to a government entity, which may reduce our revenues from convenience
fees. If the United States experiences an economic downturn, it could have a
material and adverse effect on our business, operating results and financial
condition.
12
Risks Related to This Offering
Our directors, executive officers and principal stockholders will be able to
exert significant influence over us.
After this offering, our directors, executive officers and our current
stockholders, Imperial Bank and Beranson Holdings, Inc., will beneficially own
approximately 75.0% of our outstanding common stock, or 72.3% if the
underwriters exercise their over-allotment option in full. These stockholders,
if they vote together, will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also delay or prevent a change in control of us or discourage a potential
acquirer from attempting to obtain control of us, any of which could have an
adverse effect on the market price of our common stock. See "Management" and
"Principal Stockholders" on page 59.
The tangible book value of our common stock is substantially lower than the
offering price, resulting in immediate and substantial dilution to you.
The initial public offering price will be substantially higher than the
tangible book value per share of our outstanding common stock. If you purchase
our common stock in this offering, the shares you buy will experience an
immediate and substantial dilution in tangible book value per share. The shares
of common stock owned by the existing stockholders will experience a material
increase in the tangible book value per share. The dilution to investors in
this offering will be approximately $10.87 per share. As a result, if we were
to distribute our tangible assets to our stockholders immediately following
this offering, purchasers of shares of common stock in this offering would
receive less than the amount paid for such shares. See "Dilution" on page 18.
Anti-takeover provisions in our charter and Delaware law could inhibit others
from acquiring us, which could adversely affect the market price of our common
stock.
Some of the provisions of our certificate of incorporation, bylaws and
Delaware law could, together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control; and
. limit the price that investors may be willing to pay in the future for
shares of our common stock.
In particular, our certificate of incorporation and bylaws provide, among
other things, that stockholders may not take actions by written consent, that
special meetings of stockholders may only be called by a majority of our board
of directors or by our Chairman and that approval by stockholders owning 80% of
our shares is required for the removal of our directors, the adoption,
amendment or repeal of our bylaws and the consummation of certain business
combinations with any related person. We are also subject to Section 203 of the
Delaware General Corporation Law which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any interested stockholder, as defined in the statute, for a period of three
years following the date on which the stockholder became an interested
stockholder.
Our stock has not been publicly traded before and there may be volatility in
our stock price.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest will lead to the
development of an active and liquid trading market. The initial public offering
price for the shares will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of the market
price of the common stock that will prevail in the trading market. See
"Underwriting" on page 65. The market price of the common stock may decline
below the initial public offering price. In recent years, the securities
markets have experienced substantial volatility in prevailing price levels that
is unrelated or disproportionate to the operating performance of individual
companies. The
13
market prices of the securities of Internet-related companies have been
especially volatile. Some companies that have had volatile stock prices have
been subject to securities class action suits filed against them. If a suit
were to be filed against us, regardless of the outcome, it could result in
substantial costs and a diversion of our management's attention and resources.
This could have a material adverse effect on our business, operating results
and financial condition.
Management has broad discretion as to the use of proceeds from this offering.
Our management will have broad discretion with respect to the use of
proceeds from this offering. Most of the proceeds from this offering will be
used for expenses of the business, such as hiring sales and marketing
personnel, repayment of stockholder loans and general working capital. You will
be relying on the judgment of our management about these uses. See "Use of
Proceeds" on page 16. If we do not use the proceeds of this offering
beneficially, our business, operating results and financial condition could be
materially and adversely affected.
There may be an adverse effect on the market price of our stock as a result of
shares being available for sale in the future.
Sales of a substantial amount of our common stock in the public market, or
the perception that these sales may occur, could adversely affect the
prevailing market price of our common stock. This could also impair our ability
to raise additional capital through the sale of our equity securities. After
this offering, we will have 20,000,000 shares of common stock outstanding, or
20,750,000 shares if the underwriters exercise their over-allotment option in
full. Of these shares, the shares sold in this offering will be freely
tradable, except for shares purchased by any of our affiliates, which will be
subject to the limitations of Rule 144 under the Securities Act. The remaining
shares are "restricted securities," and will become eligible for sale in the
public market at various times after 180 days after the date of this
prospectus, subject to the limitations and other conditions of Rule 144 under
the Securities Act. In addition, in connection with this offering, holders of
all shares of restricted securities and options to purchase our common stock
have agreed not to sell the shares of common stock they now own or acquire upon
exercise of such options without the prior written consent of Donaldson, Lufkin
& Jenrette for a period of 180 days from the date of this prospectus. See
"Shares Eligible for Future Sale" on page 63.
14
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "anticipate," "believe," "estimate" and
"continue" or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial condition
or state other "forward-looking" information. We believe that it is important
to communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections entitled "Risk Factors" on page 5 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 20, as well as any cautionary language in this prospectus,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our forward-
looking statements. Before you invest in our common stock, you should be aware
that the occurrence of the events described in the "Risk Factors" section and
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section and elsewhere in this prospectus could have a material
adverse effect on our business, operating results and financial condition.
15
USE OF PROCEEDS
We will receive approximately $63.0 million in net proceeds from the sale of
the shares of common stock we are offering. If the underwriters exercise their
over-allotment option in full, our net proceeds will be approximately $72.8
million. Net proceeds is what we expect to receive after paying underwriting
discounts and commissions and estimated offering expenses. For the purpose of
estimating net proceeds, we are assuming that the initial public offering price
will be $14.00 per share, which represents the midpoint of the range set forth
on the cover page of this prospectus.
We expect to use approximately $2.8 million of the net proceeds to repay the
outstanding balance of the advances available to us by our stockholders to fund
our ongoing operations. These advances are evidenced by promissory notes
bearing interest at a floating rate equal to Imperial Bank's prime rate plus 2%
per year. We expect that the outstanding balance of the promissory notes will
increase as a result of additional advances made to us by our stockholders
during the period from September 30, 1999 to the closing of this offering. For
a more detailed discussion, please see "Certain Relationships and Related
Transactions" on page 57.
We intend to use the balance of the net proceeds for working capital and
general corporate purposes, including developing new payment and Internet
services, increasing our sales and marketing staff and capabilities and making
acquisitions. While we expect to evaluate potential acquisitions from time to
time, we have no present understandings, commitments or agreements with respect
to any acquisitions.
DIVIDEND POLICY
We have neither declared nor paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends for the foreseeable future. Any
future determination as to the payment of dividends will be at the discretion
of our board of directors.
16
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. on an actual basis; and
. as adjusted to reflect the sale of 5,000,000 shares of common stock in
this offering at an assumed offering price of $14.00 per share, which
represents the midpoint of the range set forth on the cover page of this
prospectus, less underwriting discounts and commissions and estimated
offering expenses.
You should read the following table in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 20 and our financial statements and related notes included elsewhere in
this prospectus.
As of September 30,
1999 (unaudited)
---------------------
Actual As Adjusted
(In thousands)
Cash and cash equivalents................................ $ 514 $ 61,681
======== ========
Debt:
Notes payable and capital lease obligations............ $ 314 $ 113
Notes payable to stockholders.......................... 1,632 --
Stockholders' equity:
Common stock, $0.01 par value; 150,000,000 shares
authorized; 15,000,000 shares issued and outstanding,
as of September 30, 1999; 20,000,000 shares issued and
outstanding, as adjusted ............................. 150 200
Additional paid-in capital............................. 42,373 105,323
Deferred stock compensation............................ (40,711) (40,711)
Retained earnings (deficit)............................ (2,284) (2,284)
-------- --------
Total stockholders' equity .......................... (472) 62,528
-------- --------
Total capitalization............................... $ 1,474 $ 62,641
======== ========
17
DILUTION
Our net tangible book value as of September 30, 1999 was $(472,000) or
approximately $(0.03) per share, based on 15,000,000 shares of common stock
outstanding. Net tangible book value per share represents the amount of our
total tangible assets less total liabilities, divided by the total number of
shares of common stock outstanding at September 30, 1999.
Our net tangible book value as of September 30, 1999 would have been
$62,528,000, or $3.13 per share, after giving effect to the sale of the shares
of common stock in this offering at an assumed initial public offering price of
$14.00 per share, which represents the midpoint of the range set forth on the
cover page of this prospectus, less the underwriting discounts and commissions
and estimated offering expenses payable by us. This represents an immediate
increase in the net tangible book value of approximately $3.15 per share to our
existing stockholders and an immediate dilution of $10.87 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this per share dilution:
Initial public offering price per share................... $14.00
Net tangible book value per share as of September 30,
1999................................................... $(0.03)
Increase in net tangible book value per share
attributable to new stockholders....................... 3.15
------
Net tangible book value after this offering............... 3.13
------
Dilution per share to new stockholders.................... $10.87
======
The following table summarizes, as of September 30, 1999, the number of
shares of common stock we have sold, the total consideration paid to us and the
average price per share paid to us by existing stockholders and by the
investors purchasing shares of common stock in this offering, before deducting
underwriting discounts and commissions and estimated offering expenses:
Shares Purchased Total Consideration Average Price
------------------ ------------------- -------------
Number Percent Amount Percent Per Share
Existing stockholders...... 15,000,000 75.0% $ 1,396,000 2.0% $ 0.09
New stockholders........... 5,000,000 25.0 70,000,000 98.0 14.00
---------- ----- ----------- ----- ------
Total.................... 20,000,000 100.0% $71,396,000 100.0% $ 3.57
========== ===== =========== ===== ======
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution.
The tables above assume no exercise of stock options outstanding on
September 30, 1999. Options to purchase 4,488,012 shares of common stock,
having a weighted average exercise price of $1.33 per share, were outstanding
as of September 30, 1999. When and if these options are exercised, new
stockholders will experience further dilution.
18
SELECTED FINANCIAL DATA
The following selected historical financial data for each of the years in
the three year period ended December 31, 1998 and as of December 31, 1997 and
1998 have been derived from our financial statements, which have been audited
by KPMG LLP, our independent auditors and are included elsewhere in this
prospectus. The results of operations for the year ended December 31, 1995 and
1996 includes the results of operations of our predecessor company for the
period from January 1, 1995 to June 26, 1996. The selected financial data as of
December 31, 1995 and September 30, 1998 and 1999 and for the year ended
December 31, 1995 and the nine months ended September 30, 1998 and 1999 have
been derived from our unaudited financial statements, which include, in the
opinion of our management, all adjustments, consisting only of normal recurring
adjustments and deferred stock compensation, that we consider necessary for a
fair presentation of financial position and results of operations for that
period and at that date. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of results to be expected for
any future period. The information set forth below should be read along with
the financial statements and the related notes included elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 20.
Year Ended Nine Months
December 31, Ended September 30,
----------------------------------- ---------------------
1995 1996(1) 1997 1998 1998 1999
(In thousands, except per share data)
Statements of Operations
Data:
Revenues:
Transaction fees....... $ 102 $ 351 $ 935 $2,076 $ 1,286 $ 6,995
Other revenues......... 559 435 267 293 148 213
----- ------ ------ ------ --------- ----------
Total revenues..... 661 786 1,202 2,369 1,434 7,208
Total cost of revenues:
Cost of transaction
fees.................. 24 221 412 1,009 593 5,306
Cost of other
revenues.............. 63 84 284 71 13 121
----- ------ ------ ------ --------- ----------
Total cost of
revenues.......... 87 305 696 1,080 606 5,427
----- ------ ------ ------ --------- ----------
Gross profit............ 574 481 506 1,289 828 1,781
Operating expenses:
Sales and marketing.... 236 222 330 356 287 622
Development costs...... 113 238 206 608 475 648
General and
administrative........ 673 306 446 595 337 1,138
Deferred stock
compensation.......... -- -- 20 -- -- 516
Allocated expenses
from related party.... -- -- -- -- -- 118
----- ------ ------ ------ --------- ----------
Total operating
expenses.......... 1,022 766 1,002 1,559 1,099 3,042
----- ------ ------ ------ --------- ----------
Income (loss) from
operations............. (448) (285) (496) (270) (271) (1,261)
Other income (expense),
net.................... (8) (38) (6) (55) (37) (29)
----- ------ ------ ------ --------- ----------
Net income (loss)....... $(456) $ (323) $ (502) $ (325) $ (308) $ (1,290)
===== ====== ====== ====== ========= ==========
Basic and diluted net
income (loss) per
share.................. $ -- $(0.01)(/2/) $(0.03) $(0.02) $ (0.02) $ (0.09)
===== ====== ====== ====== ========= ==========
Shares used in computing
basic and diluted net
income (loss) per
share.................. -- 15,000 15,000 15,000 15,000 15,000
===== ====== ====== ====== ========= ==========
Balance Sheet Data:
Cash and cash
equivalents............ $ 44 $ 221 $ 182 $ 631 $ 361 $ 514
Working capital
(deficit).............. 64 (60) (221) 392 (313) (1,050)
Total assets............ 584 695 764 1,747 1,159 2,061
Total debt including
current portion........ 383 476 389 810 318 1,946
Stockholders' equity
(deficit).............. 141 (11) (91) 184 182 (472)
- --------
(1) Includes the results of operations of the predecessor company for the
period from January 1, 1996 to June 26, 1996.
(2) Basic and diluted net income (loss) per share excludes the net income
(loss) of $(156,000) of the predecessor company for the period from January
1, 1996 to June 26, 1996.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future events or our future financial performance which involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including, but not limited to, those set forth under "Risk Factors" on page 5
and "Business" on page 33.
Overview
We believe we are the leading provider of electronic payment options to
government entities enabling consumers to use their credit cards to pay, by
telephone or through the Internet, personal federal and state income taxes,
sales and use taxes, property taxes and fines for traffic violations and
parking citations. The use of credit cards to make payments to government
entities is relatively new and evolving. We commenced our current operations on
June 26, 1996, initially offering our credit card payment services for the
payment of fines for traffic violations, parking citations and property taxes.
We currently offer these services to approximately 425 municipalities. In
January 1999, we signed a credit card payment contract with the IRS and we
began providing our services for the balance-due payment of personal federal
income taxes. We started providing services for the payment of personal state
income taxes in California in January 1999, in New Jersey in March 1999 and in
the District of Columbia in July 1999. Consumers can make payments through our
toll-free interactive telephone system. Since August 1999, consumers have also
been able to make certain payments through our Web site, www.8882paytax.com.
Our predecessor company was originally founded in 1986 as a provider of
interactive voice response applications for the classified advertising
industry. In July 1996, our predecessor company made the decision to
discontinue those operations to focus on our current business. In April 1997,
our predecessor company sold those operations.
Our revenues consist primarily of convenience fees, which are transaction
fees paid by consumers for using our credit card payment services. In the first
nine months of 1999, our convenience fees ranged from 2.5% to 8.8% of the
amount paid per transaction. We charge a convenience fee that either varies
depending on the dollar amount of the payment or is fixed. For processing
personal federal and state income tax payments and property tax payments, the
convenience fee that we charge is a percentage of the payment amount. For
processing fines for traffic violations and parking citations, we charge a
fixed amount per ticket. We also derive a small amount of other revenues from
sales of our systems to government entities and other miscellaneous fees such
as for maintenance and consulting. Revenues are recognized upon installation of
the software for system sales. Our revenues have increased significantly since
we started providing services in January 1999 for personal federal income tax
payments.
Our primary cost of revenues is merchant discount fees paid to our credit
card processors, which, in the first nine months of 1999, ranged from 2.1% to
2.6% of the total amount paid by the consumer, depending on the credit card
used and the type of transaction. We also incur telecommunications costs of
approximately $0.50 per completed transaction through our telephone conduit.
Although there are no telecommunications costs associated with payments made
through our Internet conduit, we pay a third party license fee of $0.15 per
completed transaction for certain technology used in our Internet conduit. We
may also pay referral fees for transactions completed as a result of referrals
by third parties. We retained between 11.6% to 64.2% of the convenience fee
after paying the merchant discount fee and telecommunication costs for payments
processed
20
through our telephone conduit and 12.0% to 67.0% of the convenience fee for
payments processed through the Internet for the first nine months of 1999. Our
cost of revenues has increased significantly since January 1999 because of the
large number of personal federal income payments processed.
Processing fines for traffic violations and parking citations produces a
higher gross margin than processing personal federal and state income tax
payments and property tax payments because the convenience fee as a percentage
of fines processed is significantly higher than the convenience fee as a
percentage of federal and state income tax payments and property tax payments
processed.
Operating expenses include sales and marketing expenses, development costs,
general and administrative expenses, deferred stock compensation and allocated
expenses for related party. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing personnel. We expect to
significantly increase our sales, marketing, advertising, customer service and
new customer implementation expenditures during the next twelve months. We
believe these expenditures will enable us to increase the number of consumers
that use our electronic payment services and grow our government client base.
Development costs consist primarily of salaries for engineering personnel and
depreciation of computer equipment used to enhance our interactive telephone
system and develop our Internet services. We expense our development costs as
they are incurred. We expect to increase our development costs in the future as
we enhance our Internet conduit and develop new service offerings. This
increase will primarily relate to the hiring of additional employees performing
technical support and computer programming functions. The impact of our
strategy to expand our Internet offerings and capabilities will have minimal
effect on our results of operations and liquidity and capital resources.
General and administrative expenses consist primarily of salaries for
executive, accounting and administrative personnel. We also expect general and
administrative expenses to increase significantly as we continue to hire
additional members of our management team. We recorded $516,000 related to the
amortization of deferred stock compensation in the nine-month period ended
September 30, 1999. Allocated expenses from related party is due to Imperial
Bank employees providing consulting services to us related to this offering.
We have incurred significant losses since our inception and we expect to
continue to incur losses for the foreseeable future. As of September 30, 1999,
we had an accumulated deficit of approximately $2.3 million. We have recorded
on our balance sheet a deferred stock compensation expense totaling $41.2
million in the third quarter of 1999. This expense consists of an amount of
$10.0 million, representing the guaranteed value of options granted to Thomas
R. Evans, our Chairman and Chief Executive Officer, and an amount of $31.2
million, representing the estimated value of the common stock underlying
options we granted to certain of our other officers and employees in August and
September of 1999 in excess of the exercise price of those options. The total
amount of this expense will increase as a result of additional options that we
will grant on or prior to the completion of this offering. The $10 million
expense related to Mr. Evans' options and $27.0 million of expense related to
new options granted to other of our officers and employees will be amortized,
using a straight-line method, over a three-year period, starting in the third
quarter of 1999. The remaining $4.2 million of expenses related to options
previously granted to other officers and employees will be expensed upon
completion of this offering. See "Management--1999 Stock Incentive Plan" on
page 53 and "--Employment Agreements" on page 55 and Note 8 to our financial
statements.
Significant Government Contracts
Our agreements with our government clients are non-exclusive and short-term,
and can generally be terminated without cause on short notice, in most cases 30
to 90 days. Under these agreements, we provide our services at no charge to our
government clients and we pay the credit card discount and transaction fees.
In January 1999, we entered into an agreement with the IRS to provide credit
card payment services for the balance-due payment of personal federal income
taxes. The initial agreement expired in October 1999, and the IRS subsequently
renewed our contract. Under the terms of our agreement with the IRS, we will
provide:
. services for balance-due payments from January 14, 2000 to October 16,
2000;
21
. services for extension payments from January 14, 2000 to April 17,
2000; and
. services for estimated payments from March 1, 2000 to January 31, 2001.
Under the terms of the agreement, we must comply with availability, access
and reporting requirements specified by the IRS.
In September 1999, we entered into an agreement with the IRS to provide
services allowing taxpayers to use computer software programs both to file
personal income tax returns and to pay the balance due by credit card.
According to the agreement, we would provide these integrated filing and
payment services from January 14, 2000 to October 16, 2000. We intend to
partner with electronic filing software providers such as OrrTax Software Inc.
to provide these services. Under the agreement, the average convenience fee on
the payments cannot exceed 3% of the tax payment.
In November 1998, we entered into an agreement with Novus Services, Inc. by
which we assumed Novus' obligations under its contract with the California
Franchise Tax Board to provide credit card payment services for balance-due
personal state income taxes. The term of the agreement is indefinite.
In January 1999, we entered into a contract with the Division of Purchase
and Property of the State of New Jersey to provide credit card payment services
for balance-due and estimated personal state income taxes. The initial term of
the contract is two years, expiring in February 2001.
In December 1998, we entered into a contract with the Office of the Chief
Financial Officer of the District of Columbia to provide credit card payment
services for balance-due personal income taxes. The contract includes
provisions relating to the convenience fees we may charge, and any changes to
our fees must be approved by the District of Columbia. The initial term of the
contract is one year, expiring in December 1999, and the District of Columbia
has the option to extend the contract for periods of up to four additional
years.
Results of Operations
The following table sets forth, for the periods illustrated, certain
statements of operations data expressed as a percentage of total revenues:
As a Percentage of Revenues
-------------------------------------
Nine Months
Year Ended Ended
December 31, September 30,
------------------ ----------------
1996 1997 1998 1998 1999
Revenues:
Transaction fees......................... 45 % 78 % 88 % 90 % 97 %
Other revenues........................... 55 22 12 10 3
--- --- --- ------ ------
Total revenues......................... 100 100 100 100 100
Cost of revenues:
Cost of transaction fees................. 28 34 43 41 73
Cost of other revenues................... 11 24 3 1 2
--- --- --- ------ ------
Total cost of revenues................. 39 58 46 42 75
--- --- --- ------ ------
Gross profit............................... 61 42 54 56 25
Operating expenses:
Sales and marketing...................... 28 27 15 20 9
Development costs........................ 30 17 26 33 9
General and administrative............... 39 39 25 24 15
Deferred stock compensation.............. -- -- -- -- 2
Allocated expenses from related party
expense................................. -- -- -- -- 7
--- --- --- ------ ------
Total operating expenses............... 97 83 66 77 42
--- --- --- ------ ------
Income (loss) from operations.............. (36) (41) (12) (19) (17)
Other income (expense), net................ (5) (1) (2) (2) --
--- --- --- ------ ------
Net income (loss).......................... (41)% (42)% (14)% (21)% (17)%
=== === === ====== ======
22
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Revenues
Total revenues. Total revenues increased $5.8 million to $7.2 million for
the nine months ended September 30, 1999 from $1.4 million for the nine months
ended September 30, 1998, an increase of 414%. This increase is primarily
attributable to revenues generated from processing personal federal and state
income tax payments as well as increases in revenues from processing property
taxes and fines for traffic violations and parking citations.
Personal federal income tax. Revenues from processing personal federal
income tax payments, a service we introduced on January 15, 1999, were $4.3
million for the nine months ended September 30, 1999, representing 60% of our
total revenues. We processed approximately 44,840 transactions totaling $174.0
million during this period. On average, we charged a 2.5% convenience fee based
upon the dollar amount of the IRS payment for processing personal federal
income taxes during this period.
Personal state income tax. Revenues from processing personal state income
tax payments, a service we introduced in January 1999 for California and in
March 1999 for New Jersey, were $291,000 for the nine months ended September
30, 1999, representing 4.0% of our total revenues. We processed approximately
23,100 transactions totaling $10.0 million during this period. On average, we
charged a 2.9% convenience fee based upon the dollar amount of the payment for
processing personal state income taxes during this period.
Property taxes. Revenues from processing property tax payments increased
$597,000 to $954,000 for the nine months ended September 30, 1999 from $356,000
for the nine months ended September 30, 1998, an increase of 167%. For the nine
months ended September 30, 1999, we processed approximately 55,000 transactions
totaling $33.2 million, compared to 15,800 transactions totaling $12.6 million
for the nine months ended September 30, 1998. This increase is primarily
attributable to new local jurisdictions added subsequent to September 30, 1998.
As of September 30, 1999, we had 150 local government clients for property tax
payment services, compared to 43 as of September 30, 1998. Because of an
increase in the rate of convenience fee charged that became effective during
the second quarter of 1999, we also collected a higher convenience fee based
upon dollar amount of payment, for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. Revenues from processing
property tax payments represented 13% of total revenues for the nine months
ended September 30, 1999 compared to 25% for the nine months ended September
30, 1998.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $308,000 to $888,000 for the nine months ended September
30, 1999 from $580,000 for the nine months ended September 30, 1998, an
increase of 53%. For the nine months ended September 30, 1999, we processed
approximately 59,000 transactions totaling $8.7 million, compared to 42,500
transactions totaling $6.2 million for the nine months ended September 30,
1998. This increase is primarily attributable to higher utilization rates and
new local jurisdictions added subsequent to September 30, 1998. The convenience
fee charged remained relatively constant. As a result, the increase in revenues
was driven by increases in the number of transactions. As of September 30,
1999, we had 166 local government clients for traffic violation payment
services, compared to 109 as of September 30, 1998. Revenues from processing
fines for traffic violations represented 12% of total revenues for the nine
months ended September 30, 1999 compared to 40% for the nine months ended
September 30, 1998.
Fines for parking citations. Revenues from processing fines for parking
citations increased $91,000 to $206,000 for the nine months ended September 30,
1999 from $115,000 for the nine months ended September 30, 1998, an increase of
79%. For the nine months ended September 30, 1999, we processed approximately
69,000 transactions totaling $2.4 million, compared to approximately 39,400
transactions totaling $1.3 million for the nine months ended September 30,
1998. This increase is primarily attributable to one local jurisdiction being
added in July of 1998. The convenience fee charged remained relatively
constant. As a result, the
23
increase in revenues was driven by an increase in the number of transactions
processed. Revenues from processing fines for parking citations represented 3%
of total revenues for the nine months ended September 30, 1999 compared to 8%
percent for the nine months ended September 30, 1998.
Other transaction fees. Other transaction fees, which include revenues from
fax filing and processing payments to utilities, increased $79,000 to $314,000
for the nine months ended September 30, 1999 from $235,000 for the nine months
ended September 30, 1998, an increase of 34%.
Other revenues. Other revenues increased $65,000 to $213,000 for the nine
months ended September 30, 1999 from $148,000 for the nine months ended
September 30, 1998, an increase of 87%. The largest component of other
revenues, system sales, increased $90,000 due to two local jurisdictions
purchasing a computer system during the nine months ended September 30, 1999
compared to one local jurisdiction purchasing a computer system during the nine
months ended September 30, 1998.
Expenses
Cost of transaction fees. Cost of transaction fees increased $4.7 million to
$5.3 million for the nine months ended September 30, 1999 from $593,000 for the
nine months ended September 30, 1998, an increase of 793%. The largest
component of cost of transaction fees, merchant discount fees, increased by
$4.3 to $5.1 million for the nine months ended September 30, 1999 from $825 for
the nine months ended September 30, 1998, an increase of 521%. The cost of
telephone charges for our toll-free interactive telephone system increased by
$132 to $195 for the nine months ended September 30, 1999 from $63 for the nine
months ended September 30, 1998, an increase of 210%. Cost of transaction fees
was 73% of total revenues for the nine months ended September 30, 1999 compared
to 41% for the nine months ended September 30, 1998. The increase is due to the
lower gross margins for federal income tax payment services as compared to
other payment services.
Cost of other revenues. Cost of other revenues increased $108,000 to
$121,000 for the nine months ended September 30, 1999 from $13,000 for the nine
months ended September 30, 1998, an increase of 831%. These costs are composed
of computer hardware costs and direct labor costs for consulting and
maintenance work performed.
Sales and marketing expenses. Sales and marketing expenses increased
$335,000 to $622,000 for the nine months ended September 30, 1999 compared to
$287,000 for the nine months ended September 30, 1998. This increase was
primarily attributable to an increase in the number of sales and marketing
personnel to handle additional growth in business and in anticipation of future
growth and an increase in commission payments. Sales and marketing expenses
represented 9% of total revenues for the nine months ended September 30, 1999
compared to 20% for the nine months ended September 30, 1998.
Development costs. Development costs increased $173,000 to $648,000 for the
nine months ended September 30, 1999 compared to $475,000 for the nine months
ended September 30, 1998. This increase was primarily attributable to an
increase in the number of engineering personnel and development of our internet
conduit. Development costs represented 9% of total revenues for the nine months
ended September 30, 1999 compared to 33% for the nine months ended September
30, 1998.
General and administrative expenses. General and administrative expenses
increased $763,000 to $1.1 million for the nine months ended September 30, 1999
compared to $337,000 for the nine months ended September 30, 1998. This
increase was primarily attributable to hiring additional management personnel.
General and administrative expenses represented 15% of total revenues for the
nine months ended September 30, 1999 compared to 24% for the nine months ended
June 30, 1998.
Deferred stock compensation. Deferred stock compensation was $516,000 for
the nine months ended September 30, 1999. This was the result of $41.2 million
of deferred compensation expenses recorded in
24
August 1999 for options granted to our employees to purchase approximately
4,488,000 shares of our common stock at an exercise price of $1.33 per share.
Allocated expenses from related party. Related party expense was $118,000
for the nine months ended September 30, 1999. This was due to Imperial Bank
employees providing consulting services to us related to this offering. Related
party expense represented 2% of total revenues for the nine months ended
September 30, 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Total Revenues. Total revenues increased $1.2 million to $2.4 million for
the year ended December 31, 1998, from $1.2 million for the year ended December
31, 1997, an increase of 97%. This increase is primarily attributable to higher
revenues generated from processing a greater amount of property tax payments
for existing and new clients.
Property taxes. Revenues from processing property tax payments increased
$587,000 to $765,000 for the year ended December 31, 1998 from $178,000 for the
year ended December 31, 1997, an increase of 330%. For the year ended December
31, 1998, we processed 33,900 transactions totaling $28.2 million, compared to
8,700 transactions totaling $7.1 million for the year ended December 31, 1997.
This increase is primarily attributable to higher utilization rates and new
municipal government clients being added throughout 1997 and 1998. As of
December 31, 1998, we had 73 municipal government clients for property tax
payment services, compared to 10 as of December 31, 1997. We also collected a
higher average convenience fee for the year ended December 31, 1998 compared to
the year ended December 31, 1997. Revenues from processing property tax
payments represented 32% of total revenues for the year ended December 31, 1998
compared to 15% for the year ended December 31, 1997.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $381,000 to $827,000 for the year ended December 31, 1998
from $446,000 for the year ended December 31, 1997, an increase of 85%. For the
year ended December 31, 1998, we processed 59,200 transactions totaling $8.6
million, compared to 29,600 transactions totaling $4.4 million for the year
ended December 31, 1997. This increase is primarily attributable to higher
utilization rates and new municipal government clients being added throughout
1997 and 1998. The average convenience fee charged remained relatively
constant. The increase in revenues was driven by an increase in the number of
transactions processed. As of December 31, 1998, we had 114 municipal
government clients for traffic violation payment services, compared to 52 as of
December 31, 1997. Revenues from processing fines for traffic violations
represented 35% of total revenues for the year ended December 31, 1998 compared
to 37% for the year ended December 31, 1997.
Fines for parking citations. Revenues from processing fines for parking
citations increased $52,000 to $157,000 for the year ended December 31, 1998
from $105,000 for the year ended December 31, 1997, an increase of 50%. For the
year ended December 31, 1998, we processed 52,700 transactions totaling $1.7
million, compared to 37,600 transactions totaling $1.1 million for the year
ended December 31, 1997. This increase is primarily attributable to higher
utilization rates at existing government clients in 1998 and one new local
government entity added in July 1998. The average convenience fee charged
remained relatively constant. The increase in revenues was driven by an
increase in the number of transactions processed. Revenues from processing
fines for parking citations represented 7% of total revenues for the year ended
December 31, 1998 compared to 9% for the year ended December 31, 1997.
Other transaction fees. Other transaction fees increased $121,000 to
$327,000 for the year ended December 31, 1998 from $206,000 for the year ended
December 31, 1997, an increase of 59%. This increase is primarily attributable
to additional utility and fax filing clients added during 1998. These revenues
represented
25
14% of total revenues for the year ended December 31, 1998 compared to 17% for
the year ended December 31, 1997.
Other revenues. Other revenues increased $27,000 to $293,000 for the year
ended December 31, 1998 from $267,000 for the year ended December 31, 1997, an
increase of 10%. The increase in other revenues was primarily due to additional
consulting and maintenance fees earned related to current and prior computer
system sales.
Expenses
Cost of transaction fees. Cost of transaction fees increased $384,000 to
$1.1 million for the year ended December 31, 1998 from $696,000 for the year
ended December 31, 1997, an increase of 55%. Merchant discount fees increased
by $554,000 to $825,000 for the year ended December 31, 1998 from $271,000 for
the year ended December 31, 1997, an increase of 204%. Cost of telephone
charges increased $43,000 to $99,000 for the year ended December 31, 1998 from
$56,000 for the year ended December 31, 1997, an increase of 77%. These
increases were primarily attributable to the corresponding increase in revenue.
Cost of revenues was 46% of total revenues for the year ended December 31, 1998
compared to 58% for the year ended December 31, 1997.
Cost of other revenues. Cost of other revenues decreased $213,000 to $71,000
for the year ended December 31, 1998 from $284,000 for the year ended December
31, 1997, a decrease of 75%. This was due to a one time reclassification
adjustment that was recorded in 1997 for $261,000.
Sales and marketing expenses. Sales and marketing expenses increased $26,000
to $356,000 for the year ended December 31, 1998 compared to $330,000 for the
year ended December 31, 1997. Sales and marketing expenses represented 15% of
total revenues for the year ended December 31, 1998 compared to 27% for the
year ended December 31, 1997.
Development costs. Development costs increased $402,000 to $608,000 for the
year ended December 31, 1998 compared to $206,000 for the year ended December
31, 1997. This increase was primarily attributable to an increase in the number
of engineering personnel. Development costs represented 26% of total revenues
for the year ended December 31, 1998 compared to 17% for the year ended
December 31, 1997.
General and administrative expenses. General and administrative expenses
increased $129,000 to $595,000 for the year ended December 31, 1998 compared to
$466,000 for the year ended December 31, 1997. This increase was primarily due
to an increase in audit fees, higher depreciation expenses due to additional
capital expenditures and higher salary expenses from hiring additional support
staff. General and administrative expenses represented 25% of total revenues
for the year ended December 31, 1998 compared to 39% for the year ended
December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues. Total revenues increased $416,000 to $1.2 million for the
year ended December 31, 1997 from $786,000 for the year ended December 31,
1996, an increase of 53%. This increase is primarily attributable to revenues
generated from processing property tax payments as well as increases in
revenues from processing fines for traffic violations and parking citations.
Property taxes. Revenue from processing property tax payments increased
$172,000 to $178,000 for the year ended December 31, 1997 from $6,000 for the
year ended December 31, 1996, an increase of 2867%. For the year ended December
31, 1997, we processed 8,700 transactions totaling $7.1 million, compared to
123 transactions totaling $100,000 for the year ended December 31, 1996. We
collected a slightly lower average
26
convenience fee for the year ended December 31, 1998 compared to the year ended
December 31, 1997. Revenues from processing property tax payments represented
15% of total revenues for the year ended December 31, 1997, compared to 1% for
the year ended December 31, 1996.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $181,000 to $446,000 for the year ended December 31, 1997
from $265,000 for the year ended December 31, 1996, an increase of 68%. For the
year ended December 31, 1997, we processed 29,600 transactions totaling $4.4
million, compared to 19,500 transactions totaling $2.9 million for the year
ended December 31, 1996. This increase is primarily attributable to higher
utilization rates and new municipal governmental clients being added throughout
1996 and 1997. The average convenience fee charged remained constant. The
increase in revenues was driven by an increase in the number of transactions
processed. As of December 31, 1997 we had 52 municipal government clients,
compared to 15 as of December 31, 1996. Revenues from processing fines for
traffic violations represented 37% of total revenues for the year ended
December 31, 1997 compared to 34% for the year ended December 31, 1996.
Fines for parking citations. Revenues from processing fines for parking
citations increased $92,000 to $105,000 for the year ended December 31, 1997
from $13,000 for the year ended December 31, 1996, an increase of 708%. For the
year ended December 31, 1997, we processed 37,600 transactions totaling $1.1
million, compared to 4,400 transactions totaling $132,000 for the year ended
December 31, 1996. This increase is primarily attributable to additional
government clients added during 1997. The average convenience fee charged was
slightly higher for the year ended December 31, 1997 compared to the year ended
December 31, 1996. The increase in revenues was driven both by an increase in
the number of transactions processed and an increase in the average convenience
fee. Revenues from processing fines for parking citations represented 9% of
total revenues for the year ended December 31, 1997 compared to 2% for the year
ended December 31, 1996.
Other transaction fees. Other transaction fees increased $139,000 to
$206,000 for the year ended December 31, 1997 from $67,000 for the year ended
December 31, 1996, an increase of 207%. This increase is primarily attributable
to additional utility and fax filing clients added during 1997. These revenues
represented 17% of total revenues for the year ended December 31, 1997 compared
to 9% for the year ended December 31, 1996.
Other revenues. Other revenues decreased $168,000 to $267,000 for the year
ended December 31, 1997 from $435,000 for the year ended December 31, 1996, a
decrease of 39%. The decrease in other revenues was primarily due to decrease
in computer system sales of $167,000.
Expenses
Cost of transaction revenues. Cost of transaction revenues increased
$391,0000 to $696,000 for the year ended December 31, 1997 from $305,000 for
the year ended December 31, 1996, an increase of 128%. Merchant discount fees
increased $202,000 to $271,000 for the year ended December 31, 1997 from
$69,000 for the year ended December 31, 1996, an increase of 293%. Cost of
other revenues increased $200,000 to $284,000 for the year ended December 31,
1997 from $84,000 for the year ended December 31, 1996, an increase of 238%.
This increase was primarily attributable to costs associated with system sales
that occurred in 1997. Cost of revenues was 58% of total revenues for the year
ended December 31, 1997 compared to 39% for the year ended December 31, 1996.
Cost of other revenues. Cost of other revenues increased $240,000 to
$284,000 for the year ended December 31, 1997 from $44,000 for the year ended
December 31, 1996, an increase of 545%. This was due to a one time
reclassification adjustment that was recorded in 1997 for $261,000.
Sales and marketing expenses. Sales and marketing expenses increased
$108,000 to $330,000 for the year ended December 31, 1997 compared to $222,000
for the year ended December 31, 1996. Sales and
27
marketing expenses represented 27% of total revenues for the year ended
December 31, 1997 compared to 28% for the year ended December 31, 1996.
Development costs. Development costs decreased $32,000 to $206,000 for the
year ended December 31, 1997 compared to $238,000 for the year ended December
31, 1996. The decrease in development costs was primarily attributable to
capitalization of $200,000 in development costs in 1997 as a result of
establishing technological feasibility upon completion of a working model for
our software systems. Development costs represented 17% of total revenues for
the year ended December 31, 1997 compared to 30% for the year ended December
31, 1996.
General and administrative expenses. General and administrative expenses
increased $160,000 to $466,000 for the year ended December 31, 1997 compared to
$306,000 for the year ended December 31, 1996. This increase was primarily due
to an increase in salary expenses from hiring additional personnel. General and
administrative expenses represented 39% of total revenues for the years ended
December 31, 1997 and 1996.
28
Selected Unaudited Quarterly Results of Operations
The following tables set forth certain unaudited quarterly results of
operations data for the seven quarters ended September 30, 1999, as well as the
percentage of our revenues represented by each item. We believe this data has
been prepared on substantially the same basis as the audited financial
statements contained in this prospectus, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below for the fair presentation of the quarterly results of
operations. The quarterly results of operations data should be read along with
our audited financial statements and the related notes appearing elsewhere in
this prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for future periods.
Three Months Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1998 1999 1999 1999
(Dollars in thousands)
Revenues:
Transaction fees...... $ 287 $ 507 $ 492 $ 790 $ 728 $5,247 $ 1,020
Other revenues........ 34 71 43 145 102 36 75
----- ----- ----- ----- ----- ------ -------
Total revenues...... 321 578 535 935 830 5,283 1,095
Cost of revenues:
Cost of transaction
fees................. 108 253 232 416 421 4,397 488
Cost of other
revenues............. 7 4 2 58 19 2 100
----- ----- ----- ----- ----- ------ -------
Total cost of
revenues........... 115 257 234 474 440 4,399 588
----- ----- ----- ----- ----- ------ -------
Gross profit............ 206 321 301 461 390 884 507
Operating expenses:
Sales and marketing... 102 96 89 69 175 260 187
Development costs..... 119 163 193 133 140 180 328
General and
administrative....... 112 113 112 258 199 350 589
Deferred stock
compensation......... -- -- -- -- -- -- 516
----- ----- ----- ----- ----- ------ -------
Allocated expenses
from related
parties.............. -- -- -- -- -- -- 118
Total operating
expenses........... 333 372 394 460 514 790 1,738
----- ----- ----- ----- ----- ------ -------
Income (loss) from
operations............. (127) (51) (93) 1 (124) 94 (1,231)
Other income (expense),
net.................... (5) (17) (15) (18) 3 (33) 1
----- ----- ----- ----- ----- ------ -------
Net income (loss)....... $(132) $ (68) $(108) $ (17) $(121) $ 61 $(1,230)
===== ===== ===== ===== ===== ====== =======
Revenues:
Transaction fees........ 89 % 88 % 92 % 84 % 88 % 99 % 93
Other revenues.......... 11 12 8 16 12 1 7
----- ----- ----- ----- ----- ------ -------
Total revenues.......... 100 100 100 100 100 100 100
Cost of revenues:
Cost of transaction
fees................. 34 44 44 45 51 83 44
Other revenues........ 2 1 0 6 2 0 10
----- ----- ----- ----- ----- ------ -------
Total cost of
revenues........... 36 45 44 51 53 83 54
----- ----- ----- ----- ----- ------ -------
Gross profit............ 64 55 56 49 47 17 46
Operating expenses:
Sales and marketing... 32 17 17 7 21 5 17
Development costs..... 37 28 36 14 17 3 30
General and
administrative....... 35 19 21 28 24 7 54
Deferred stock
compensation......... -- -- -- -- -- -- 47
----- ----- ----- ----- ----- ------ -------
Allocated expenses
from related
parties.............. -- -- -- -- -- -- 11
Total operating
expenses........... 104 64 74 49 62 15 159
----- ----- ----- ----- ----- ------ -------
Income (loss) from
operations............. (40) (9) (18) -- (15) 2 (112)
Other income (expense),
net.................... (1) (3) (3) (2) -- (1) --
----- ----- ----- ----- ----- ------ -------
Net income (loss)....... (41)% (12)% (21)% (2)% (15)% 1 % (112)%
===== ===== ===== ===== ===== ====== =======
29
Seasonality and Fluctuation of Quarterly Results
We have experienced quarter-to-quarter revenue growth with some seasonal
fluctuations in the second and fourth quarters of 1998 and the second quarter
of 1999. The quarter-to-quarter revenue growth is due to an increase in the
number of government clients and payment services and an increase in
utilization rates. The fluctuations in the second and fourth quarter of 1998
relate primarily to an increase in convenience fees from processing California
property tax payments, which are collected twice a year -- in April and
December. The sharp increase in revenues in the second quarter of 1999 is due
to processing personal federal income tax payments in April 1999. We expect
that results for the second quarter of future years will continue to be
impacted by the April 15 deadline for paying personal federal and state income
taxes.
Cost of revenues as a percentage of total revenues was significantly higher
in the second quarter of 1999 than in previous quarters as a result of
processing federal income tax payments, which have significantly lower margins
than other payment services. This is due to the fact that our convenience fee
is generally lower as a percentage of large government payments, such as income
taxes, while our primary cost of sales, which are merchant discount fees, are
relatively constant as a percentage of the government payment amount. For a
discussion of convenience fees, please see "Business--Our Services--Fee
Structure" on page 41.
We anticipate that our operating expenses will continue to increase
significantly due to the anticipated expansion of our sales force in order to
obtain additional state and municipal clients, the marketing campaign to make
consumer users aware of our electronic payment option, and development and
implementation costs associated with our Internet service. If revenues in any
quarter do not increase correspondingly with increases in expenses, our results
for that quarter would be materially and adversely affected.
For the foregoing reasons, we believe that comparisons of our quarterly
operating results are not necessarily meaningful and that our operating results
in any particular quarter should not be relied upon as necessarily indicative
of future performance. In addition, it is possible that in some future quarters
our operating results will be below the expectations of research analysts and
investors, and in that case, the price of our common stock is likely to
decline.
Liquidity and Capital Resources
Historically, we have experienced operating losses during most periods. We
expect to continue to incur losses from operations for the foreseeable future.
Our working capital deficit was $60,000 at December 31, 1996. We had a working
capital deficit of $221,000 at December 31, 1997. In December 1998, there was a
capital contribution of $600,000 and our working capital was $392,000 at
December 31, 1998. At September 30, 1999, our working capital deficit was $1.1
million.
Net cash used in operating activities was $904,000 for the nine months ended
September 30, 1999. For the nine months ended September 30, 1998, our operating
activities used cash of $98,000. For the year ended December 31, 1998, 1997 and
1996, net cash used in operating activities were $245,000, $323,000 and
$425,000, respectively.
The cash used in operating activities for the nine months ended September
30, 1999 was primarily due to an increase in accounts receivable and a decrease
in accounts payable. For the nine months ended September 30, 1998, the cash
provided by operating activities was primarily attributable to a decrease in
accounts receivable. Cash used for operating activities for the years ended
December 31, 1998, 1997 and 1996 were primarily the result of our net loss and
an increase in accounts receivable.
Net cash used in investing activities was $255,000 and $148,000 for the nine
months ended September 30, 1999 and 1998 and $298,000 and $139,000 for the
years ended December 31, 1998 and 1997. This cash was used primarily for the
purchase of computer equipment and software.
30
Net cash provided by financing activities was $1.0 million and $425,000 for
the nine months ended September 30, 1999 and 1998 and $992,000, $423,000 and
$581,000 for the years ended December 31, 1998, 1997 and 1996. The cash
generated in the nine months ended September 30, 1999 resulted from advances we
received from our stockholders. The net cash generated in the nine months ended
September 30, 1998 was primarily due to a loan we received from Beranson
Holdings, Inc. The cash generated in 1998, 1997 and 1996 was due to capital
contributions by our stockholders. As of September 30, 1999, we have the
ability to borrow an additional $500,000 from our stockholders.
We believe that, based on our current business plan, the net proceeds from
this offering and existing cash equivalents will be sufficient to meet our
operating activities, capital expenditures and other obligations for at least
the next two years.
Year 2000 Readiness
Many currently installed computer systems and software products were coded
to accept and recognize only two-digit rather than four-digit entries to define
the applicable year. These systems may recognize a date using "00" as the year
1900 rather than the year 2000. As a result, computer systems and/or software
used by many companies, including our government clients and financial
institutions upon which we rely to perform our services, may need to be
upgraded to comply with year 2000 requirements. Those companies that do not
upgrade risk system failure and/or miscalculations that can cause disruptions
of normal business activities.
State of Readiness. We have completed our assessment of our service and
information technology systems. We believe that all of our mission critical
systems and a majority of our non-mission critical systems are year 2000
compliant. We have also completed our initial survey of the information systems
of our principal system vendors and service providers. Based on the oral
representations of these vendors and service providers, we believe that the
information technology systems of these third parties, as they relate to us, do
not pose significant operational issues. We have replaced those principal
vendors that have been unable to certify to us that their products are year
2000 compliant. Our assessment is on-going and will continue with respect to
all principal vendors and service providers with which we do business. In
addition, we do not believe that our embedded systems pose year 2000 concerns
because we believe that we have identified all of our software and hardware
that require year 2000 updates or modifications.
Costs. We currently anticipate that our total expenses for year 2000
compliance will be less than $100,000. As of September 30, 1999, we have spent
approximately $60,000 in personnel and other costs related to our year 2000
risk assessment and remediation efforts.
Risks. All of our installed systems have customized programming code, many
with date specific routines required by our government clients. If the host
system/database supporting the customized system changes due to year 2000
upgrades, we may incur a failure to our operating system. Based upon tests
conducted by our government clients, we believe these problems can be promptly
remedied. However, we cannot guarantee that the test cases represent all of the
possible year 2000 problems and that longer remedial periods will not be
required.
If a system failure occurs unrelated to coding, we believe we would be able
to rebuild the failed system in a timely manner. Should such a system failure
occur, we may need to rely on a large client to provide appropriate client
representation for customer relations and technology support services to assist
in fixing the problem. We cannot guarantee that our government clients will
provide this assistance or that we would be able to rebuild our system in the
anticipated time frame.
Contingency Plans. We have developed a contingency plan based on the use of
backup computer systems in the event a year 2000 problem occurs. We house both
our interactive telephone and Internet processing systems in dual locations to
provide complete system redundancy. These facilities contain emergency power
generators and backup computer systems, which would be used in the event of
failure due to
31
a year 2000 problem. Because each system has interchangeable power supplies and
hard drives, if we experience system failure, the redundant system is expected
to immediately assume the functions of the failed system without interruption
of service.
Our contingency plan is periodically reviewed for adequacy with respect to
our client base as well as to determine whether any new products or services we
offer are consistent with our plan. Due to incremental increases in the use of
our services, we cannot guarantee that at any given time our contingency plan
adequately provides for the latest increase in use. Although our contingency
plan has been tested against various year 2000 problem scenarios, we cannot be
certain that we have provided for all contingencies, or that in the event of an
actual year 2000 problem, our backup system will operate as planned.
New Accounting Pronouncement
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. We must adopt SFAS No. 133 by July 1, 2001.
Our management does not believe the adoption of SFAS No. 133 will have a
material effect on our financial position.
In March 1998, the American Institute of Certified Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use, or SOP 98-1. SOP 98-1 provides guidance
on accounting for computer software developed or obtained for internal use,
including the requirement to capitalize specified costs and amortization of
such costs. We adopted SOP 98-1 in January 1999. The adoption did not have a
material effect on our financial position or results of operations.
32
BUSINESS
Company Overview
We believe we are the leading provider of electronic payment options to
government entities enabling consumers to use their credit cards to pay, by
telephone or through the Internet, personal federal and state income taxes,
sales and use taxes, property taxes and fines for traffic violations and
parking citations. Our interactive toll-free telephone number, 1-888-2PAY-
TAXSM, allows consumers to make payments and receive certain customer service
information. Our 8882paytax.com Web site currently allows consumers to make
certain payments, and we are actively working with government clients,
including the IRS and the States of California and New Jersey to enable
consumers to make additional tax and other payments through the Internet.
Industry Background
Growth of Electronic Commerce and the Internet
Increased use of credit cards, automated teller machines, electronic fund
transfers and direct payroll deposits have automated, simplified and reduced
the costs of financial transactions for financial institutions and businesses
and their customers. Electronic commerce offers the potential to complete
financial transactions more quickly, with greater accuracy and at a lower cost
than traditional paper-based methods, and provides consumer users with added
convenience. Consumers now routinely perform financial transactions by
telephone, using an interactive telephone system, and through the Internet.
The Internet has experienced rapid growth and has become an important tool
for global communications and commerce. International Data Corporation
estimates that there were 97 million Web users worldwide at the end of 1998 and
projects this number will increase to approximately 320 million by the end of
2002. Internet-based financial services, such as electronic brokerage and
banking, represent a significant portion of the electronic commerce market. The
attractiveness of Internet-based financial services stems in large part from
the speed and ease of conducting financial transactions over the Internet, as
well as the ability of the Internet user to access additional information. The
number of U.S. households using online banking is projected to grow from 7
million at the end of 1998 to more than 24 million by 2004, according to
Dataquest, Inc., a unit of Gartner Group, Inc. Dataquest, Inc. estimates that
approximately 57%, or about 13.7 million, of these households will be paying
their bills online by 2004.
Online communities on the Internet provide businesses an attractive means of
promoting and selling their products and services. As we facilitate Web-based
payments by individuals to government entities, we believe there are
opportunities to offer and cross-sell contextually compatible services to our
consumers. International Data Corporation estimates that commerce over the
Internet will increase from approximately $32 billion worldwide in 1998 to
approximately $133 billion in 2000 and to $1 trillion by 2003. Online
communities that allow businesses to identify and reach specific audiences
within a personalized context provide the opportunity to increase advertising
efficiency and improve the likelihood of success for these businesses'
advertising campaigns.
The Market for Payments to Government Entities
In addition to payments made automatically on behalf of consumers, such as
payroll withholding taxes, individuals and small businesses make a variety of
payments to government entities at the federal, state and local levels. These
payments have traditionally been made by mailing checks, obtaining money orders
or making payments in person.
. Federal Level. The IRS estimates that for the 1999 tax year, there will
be 128 million personal federal income tax filers making payments
totaling approximately $920 billion, a portion of which is remitted
through payroll withholding. Of these income tax filers, the IRS
estimates that there are
33
approximately 21 million individuals who will pay the balance shown as
due on their tax return when filing their tax return on or before April
15 and 8 million individuals who pay taxes when filing for extensions of
the April 15 deadline. Further, an additional 41 million estimated tax
payment transactions are expected to be made by individuals for the 1999
tax year. Based on IRS data, we believe that payments for "balance-due"
filers for the 1999 tax year will be approximately $45 billion. For
"extension filers" this amount is approximately $206 billion and for
"estimated filers" it is approximately $162 billion. Accordingly, total
payments for the 1999 tax year are estimated to be approximately $414
billion.
. State Level. Based on U.S. Census data, personal state income tax
payments were approximately $160 billion for the 1998 tax year. Based on
our experience with respect to personal federal income tax payments, we
believe that approximately 45%, or $72 billion, of this total
constitutes balance-due, estimated and extension tax payments. Based on
U.S. Census data, state sales and use taxes paid by businesses totaled
approximately $155 billion for 1998, a portion of which is paid by small
businesses using checks or money orders. Fees collected by states for
motor vehicle licenses and registrations are estimated to have been
approximately $14 billion in 1998. Other state payments that could
potentially be made electronically include corporate fees and taxes,
professional license fees, employment withholding taxes and state
disability insurance payments made by individuals and businesses.
. Local Level. Based on U.S. Census data, local property taxes were
approximately $225 billion in 1998. Based on our experience in the
states where we accept credit card payments for such taxes, we estimate
approximately 50% of that amount is not already included with mortgage
payments. There are a substantial number of other payments to local
government entities that could be paid electronically. For example, we
estimate fines for traffic violations and parking citations to be in
excess of $5 billion annually.
Outsourcing Opportunity
Providing electronic payment options is an attractive goal for government
entities. Part of the IRS's stated strategy is to make electronic filing,
payment and communication so simple, inexpensive and trusted that taxpayers
will prefer these methods. Further, the IRS has stated that its goal is to
substantially increase taxpayer access to electronic filing, payment, and
communication products and services, and have 80% of all taxpayers file their
returns electronically by the year 2007. Electronic payments provide
significant benefits for government entities, including improved service, cost
savings, reduced paperwork and faster transaction processing.
Government entities may prefer to outsource electronic payment options
rather than provide such options themselves because they lack the expertise,
technical personnel and economies of scale necessary to implement and maintain
the required software and hardware systems. In addition, legislation prohibits
certain government entities from paying credit card payment processing fees
associated with accepting credit cards.
In selecting a provider of outsourced credit card payment services, we
believe government entities consider the following:
. a provider's ability to offer these services at no cost to the
government entity;
. referrals from other government entities currently using a provider's
services;
. proven technology systems and implementation know-how;
. consumer usage of the provider's services;
. the greatest possible consumer reach through both Internet and telephone
conduits;
. a provider's relationships with financial institutions and credit card
companies; and
. flexibility in adapting to unique government procedures.
34
Our Solution
Our pilot program for personal federal income taxes processed approximately
45,000 tax filings totaling more than $174 million in payments to the IRS from
January 15, 1999 to April 15, 1999. According to IRS data, we captured a 95%
market share, based on dollar volume, for credit card payments of personal
federal income taxes due April 15, 1999. We also processed over 293,000
payments totaling $82.7 million during the first nine months of 1999 for our
state and municipal government clients.
Benefits to Consumer Users
Although consumers must pay a convenience fee for our services and, a breach
of our security system could allow access to personal credit card and other
information, we believe that the following benefits of our services to
consumers outweigh their detriments:
. Convenience. Consumers can utilize our interactive telephone or Internet
system to make payments to government entities by credit card,
eliminating the need to mail checks, obtain money orders or make
payments in person. As we integrate the federal and our state clients'
income tax payment processes, consumers in those states will be able to
pay their personal federal and state income taxes in a single session.
For some fines for traffic violations and parking citations, consumers
can also obtain information about outstanding balances.
. Flexibility. By paying with credit cards, consumers gain the flexibility
to pay their credit card balances over time rather than when a
government obligation is due. This is an especially attractive option
for consumers who do not have sufficient funds when the government
payment is due.
. Perquisites. Consumers can take advantage of frequent flyer programs,
cash back arrangements or other benefits offered by credit card issuers.
Payments for government obligations can be substantial, allowing
consumers to earn significant rewards.
Benefits to Government Clients
Although there may be some indirect cost to the government entity to promote
our services, we believe that the following benefits of our services to
government clients outweigh their detriments:
. Electronic Payment Option. Our services allow our government clients to
provide consumers with an electronic payment option, furthering their
goal of improving customer service, reducing paperwork and encouraging
the electronic filing of tax forms.
. No Charge. We provide our electronic payment options to our government
clients at no charge.
. Electronic Posting. Credit card payments allow information to be posted
electronically to our government clients' existing systems, with real-
time authorizations and posting, including fraud checking, credit
availability and address verification.
. Ease of Implementation. Our services are designed to work with the
information system in place at our government clients and to require
minimal adaptation. For example, government entities do not have to be
Web-enabled to offer our Internet payment solutions to their
constituents.
Proven Track Record
We have successfully provided a secure credit card payment option to the
IRS, the states of California and New Jersey and the District of Columbia, as
well as approximately 425 municipalities. In the nine months ended September
30, 1999, we processed approximately $257 million in credit card payments to
our government clients.
Recognized and Trusted Brand Name
Most of our government clients list our interactive telephone number, 1-888-
2PAY-TAX SM, as a payment option on their billing statements, tax publications
and citations. The IRS has informed us that it plans to include our 1-888-2PAY-
TAX SM number on instruction booklets for Form 1040 for the 1999 tax year and
on the
35
IRS Web site. We believe that by featuring us on their billing statements and
instruction booklets, government entities increase consumer awareness of and
confidence in our services. We intend to further increase our brand awareness
through advertising targeted towards consumer users. We believe that once a
consumer successfully uses our services to make a payment, the consumer is more
likely to use our service for future payments. According to a study conducted
for us by a market research firm among consumers who had used our services, 89%
of respondents stated that they plan to use our services again.
Existing Relationships with Credit Card Issuers and Associations
We believe our existing relationships with the major credit card issuers and
associations will enable us to continue to provide electronic payment options
for a broadening array of payments to government entities. We currently process
payments using American Express(R), Visa(R), MasterCard(R) and the Discover(R)
card. Imperial Bank, our majority stockholder, is a long-standing member of the
Visa(R) and MasterCard(R) associations and processes transactions utilizing
those credit cards for us. We are a merchant agent for American Express(R),
eliminating the need for government entities to separately enter into contracts
with American Express.
All four credit card associations and organizations with whom we do business
allow for convenience fees as long as the cardholder receives added convenience
from the service. These card associations and issuers, except for Visa(R),
allow for a tiered fee schedule that varies the fee depending on the amount
charged. Because of Visa(R)'s rules against tiered convenience fees, we do not
accept Visa(R) cards as a means of payment in tax-related payment programs,
such as the IRS, the States of California and New Jersey and the District of
Columbia. We do, however, accept Visa(R) as a means of payment in all non-tax-
related payment programs, such as parking citations processing, where fixed
conveniences fees can be charged.
Our Strategy
Our goal is to continue to be the leading provider of, and further develop
the market for, electronic payment services using credit cards to pay
government obligations. The following are key elements of our strategy.
Expand and Enhance Services for Personal Federal Income Tax Payments
In January 1999, we signed a credit card payment contract with the IRS to
provide our services for the balance-due payment of personal federal income
taxes. This has significantly increased our profile and greatly expanded
awareness of our 1-888-2PAY-TAX SM brand. The IRS has informed us that it plans
to add our 1-888-2PAY-TAX SM number on instruction booklets for Form 1040 for
the 1999 tax year and on the IRS Web site which, we believe, will further
expand consumers' awareness of our products and services. For the 1998 tax
year, we processed only income tax payments that were shown as due on tax
returns filed on or before April 15, 1999. By early 2000, we expect to also
process estimated and extension tax payments. We have a working relationship
with the IRS's Electronic Tax Administration division (ETA). In 1998, the ETA
published A Strategy For Growth, a document detailing its strategies through
the year 2007, which features us as one of the ETA's industry partners and
describes our electronic payment options. Further, we are working to develop a
series of additional products that are consistent with their stated strategic
objectives. The majority of these products focus on electronic filing and
payment integration of personal federal and state income taxes.
Leverage Our IRS Relationship to Obtain Additional State Government Clients
We are leveraging our IRS relationship to provide our services to additional
state government entities. Our efforts have been bolstered by the fact that the
IRS has endorsed the concept of joint federal and state payments either by
phone or through electronic filing. We currently provide our electronic payment
conduit for income
36
tax payments to the States of California and New Jersey and the District of
Columbia, which together accounted for 21% of the personal state income tax
market in the 1998 tax year. We are focusing on establishing relationships with
other states, the 9 largest of which represented another 43% of the personal
state income tax market in the 1998 tax year. We are hiring new regional sales
managers and sales account executives to extend our coverage of state
governments. A key element of our strategy for obtaining personal state income
tax accounts is the integration of the personal federal and state income tax
payment processes. According to a research study conducted for us by a market
research firm among consumers who had used our personal federal income tax
payment services in 1999, 75% indicated that they would use our services to
make personal state income tax payments. Our integrated solution allows
consumers to pay their personal federal and state income taxes in a single
session, which should enhance consumer convenience and usage. Competitors who
do not currently provide services to the IRS will be unable to offer this
integrated service. Once we are providing personal income tax payment services
to a particular state, we will look for opportunities to provide additional
services covering sales and use tax payments, fees collected by departments of
motor vehicles and other payments for that state. For example, we are currently
providing services that allow small businesses in California to remit their
sales and use tax payments by credit card.
Leverage Our IRS and State Government Client Relationships to Obtain
Additional Municipal Clients
We currently provide services to over 400 municipal clients. We believe our
relationships with the IRS and state government entities provide an advantage
in helping us establish relationships with additional municipal clients. To
further our strategic marketing position, we are creating a geo-demographic
database of consumers who have already used our services. This database will be
used in the selling process to municipalities to show an existing base of
potential consumers in those municipalities. We are targeting municipal clients
through direct sales, telemarketing and targeted newsletters and other
mailings.
Internet Services Roll-out
In August 1999, we began providing our payment services through the
Internet. We intend to offer our Internet payment services to all of our
existing government clients within the next 6 to 12 months. In addition, all
new government clients will have the option to sign up for both our Internet
and telephone payment services.
We currently offer Internet services for business license fees, parking
citations, personal property tax, real estate tax, utility payments and other
fees only in Arlington County, Virginia and Fairfax County, Virginia. We have
verbal agreements to provide Internet Services for such payments by the end of
the year to the following government entities:
. Marion County, Ohio
. Lucas County, Ohio
. Grand Blanc Township, Michigan
. Grand Blanc DPW, Michigan
. Rochester Hills, Michigan
. Allen County, Indiana
. Alexandria, Virginia
. Hanover County, Virginia
We also have verbal agreements with the States of California and New Jersey
for state income tax payments via the Internet, which we expect to offer on our
Web site by the end of the year.
37
We expect the Internet to be an increasingly important revenue source.
However, Internet access is currently estimated to reach only 25% of the U.S.
households, including a majority of households with greater than $75,000 of
annual income compared to 94% for telephone. Therefore, we expect that the
majority of our revenues will be generated by our interactive telephone service
in the next few years. As more U.S. households acquire Internet access, we
expect that consumers will increasingly want both the telephone and Internet
options we offer.
Introduce New Services and Service Enhancements
In August 1999, we began processing credit card payments of sales and use
taxes for the State of California. By early 2000, we expect to begin processing
credit card payments of estimated and extension personal federal and state
income taxes. We seek to remain at the forefront of our industry by continuing
to develop additional and complementary services. We are exploring
opportunities to process other payments, such as motor vehicle registration
fees, state corporate fees and taxes, professional license fees, employment
withholding taxes and state disability insurance. We are also exploring
opportunities to provide direct debiting and other electronic fund transfer
features to consumers in the future.
Cross-Sell Related Services to Targeted Audiences
Individuals and small businesses who utilize our payment services can be
grouped into user communities distinguished by specific demographics and
psychographics. Because these customers are active online consumers, they
represent a valuable opportunity to expand our business by cross-selling other
related services. For example, we may be able to facilitate the sale of
consulting or other related services to small businesses that use our services
to pay sales taxes, or the sale of automobile insurance or online driving
school services to consumers paying fines for moving violations.
Increase Brand Awareness and Consumer Use
We have relied on our government clients and credit card issuers, and will
continue to work with them, to publicize our services through government
publications and credit card billing inserts. In order to increase the number
of transactions we process, we intend to increase consumer awareness of our
credit card payment services through an advertising campaign. We expect to
increase our advertising spending with the proceeds of this offering. The
advertising campaign will focus on promoting our services for personal federal
and state income tax payments in March and early April. In addition, we plan to
advertise throughout the year at the local level to promote our payment
services for property taxes and fines for traffic violations and parking
citations.
Our marketing is also focused on promoting additional payment opportunities
to our existing consumers. We believe that once a consumer uses our system, he
or she is more likely to use our services to make other types of payments to
government entities. Our Web site will promote different types of payments that
can be made using our services. In addition, our Web site will invite consumer
users to save their personal data on our secured site to facilitate future
payments. We will use this data to identify and promote additional payment and
cross-selling opportunities.
Pursue Strategic Relationships and Acquisitions
We intend to pursue strategic relationships with electronic income tax
filing providers to offer our payment services to their customers, which would
allow their customers to file returns and pay taxes electronically. We also
plan to investigate and pursue relationships with Internet portals and other
Internet financial service providers in order to reach additional Internet
users. In addition, we may pursue opportunistic acquisitions that will enhance
our product offering and technical capabilities, including companies that
provide government client or consumer user products or services closely related
to ours.
38
Government Clients
As of September 1, 1999, we provide services to the IRS, the States of
California and New Jersey, the District of Columbia and approximately 425
municipal government clients in 25 states throughout the United States. The
highest concentration of municipalities we service are in California, Texas and
Virginia. The table below lists, as of September 1, 1999, our existing
government clients and the types of payments we process for those clients.
Government Clients Payment Type
IRS Balance-due personal federal income taxes
California Balance-due personal state income taxes
Sales and use taxes
New Jersey Balance-due and estimated personal state income
taxes
District of Columbia Balance-due personal state income taxes
150 municipalities Property taxes
166 municipalities Fines for traffic violations
115 municipalities Fines for parking citations
81 municipalities Other services
Our Services
Our Telephone and Internet Conduits
Our consumers can choose to make payments of federal, state and municipal
taxes, as well as pay fines for traffic violations and parking citations, by
telephone, using our 1-888-2PAY-TAX SM number, or over our 8882paytax.com Web
site. We currently provide a telephone conduit for payments to all of our
government clients. We work with our government clients to develop the script
for our fully automated telephone conduits, which gather the necessary
information in an efficient, user-friendly manner and inform the customers of
the applicable convenience fee to be charged before the consumer confirms or
cancels the payment. We continually update our interactive telephone systems to
increase the ease of use of our services.
Our 8882paytax.com Web site allows consumers to make certain payments, and
we are working with our existing government clients, including the IRS, to
enable consumers to make additional payments. We are also enhancing our Web
site so that consumers will be able to obtain information regarding our
services, access additional information, print receipts and save their personal
data to facilitate future payments. Consumers using our Web site will receive a
prompt informing them of the convenience fee before they confirm or cancel the
payment. With the growing acceptance of the Internet and its use for effecting
financial transactions traditionally conducted by mail, telephone or in person,
we believe many users will prefer to make payments to our government clients
through the Internet.
39
The following table lists the payments that can be made through our existing
Internet site and interactive telephone system:
Internet Payment Types Telephone Payment Types
. Business license fees . Automated fax filings
. Parking citations . Business license fees
. Personal property tax . Federal income tax
. Real estate tax . Homeowner's association
dues
. Utility bills . Parking citations
Current Internet Clients . Personal property tax
. Arlington County, VA
. Real estate tax
. Fairfax County, VA
. Sales and use tax
. State income tax
. Traffic Violations
. Utility bills
Credit Card Payment Services
For each payment type listed below, the following table sets forth the
payments we currently process, those which we currently plan to provide
pursuant to existing agreements and future services that we plan to begin
processing within the next 6 to 12 months.
Payment Type Currently Processed Currently Planned Services Future Services
Personal federal Balance-due payments Estimated taxes
income taxes.......... Extension payments
Integrated payment
of personal
federal and state
income taxes
Personal state income Balance-due payments Extension payments
taxes................. Estimated tax payments Integrated payment
of personal
federal and state
income taxes
Other state payments.. Sales and use taxes
Business and
professional
license fees
Property taxes........ Real estate and
personal property
taxes and school
district taxes
Fines for traffic Fines for speeding and
violations............ other
traffic rule
violations
Fines for parking Fines for parking rule
citations............. violations
Utilities/miscellaneous.. Water, electricity and
gas bills
Other payments........ Corporate taxes and
fees
Motor vehicle
registration
fees
Public university
tuition
and other fees
Building permit fees
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Customized Systems
In addition to our electronic payment services, we design, install and
implement individual systems for municipal government clients. These systems
incorporate our electronic payment conduits and also provide connections
between databases to transfer information simultaneously. These products
include:
Property Tax System.... Provides information about real estate taxes,
including secured and unsecured taxes,
supplemental taxes, asset valuation and
exemptions, tax rates, special assessments and
redemptions.
Citation Processing Provides information about traffic violations,
System................. including bail, due dates, traffic school, proof
of corrections, warrants and drivers license
holds.
Parking System......... Provides information about parking citations,
including fines, tow-aways, restricted zones and
other infractions.
Automated Fax Filing... Allows attorneys and paralegals to fax documents
to courts and pay filing fees by credit card.
We also build and sell custom applications, such as a polling place locator
application, county social service inquiry system and additional government-
related applications. These systems are generally sold to the government entity
for a flat fee that covers our costs and provides significant margin.
Fee Structure
We charge consumer users a convenience fee to use our credit card services
for payments to government entities. For large payments, such as personal
federal and state income tax payments, we charge a convenience fee based on the
amount of the payment, which in the first six months of 1999 averaged
approximately 2.5% of the payment amount. For smaller payments, such as fines
for traffic violations and parking citations, we charge a fixed convenience fee
which in the first six months of 1999 averaged 8% of the amount due. The same
convenience fee is charged for payments made by telephone or through the
Internet. We currently accept American Express(R), Visa(R), MasterCard(R) and
the Discover(R) card for most local payments. We currently accept American
Express(R), MasterCard(R) and the Discover(R) card for federal and state
payments.
Cross Selling
We intend to develop cross-selling opportunities for both the telephone
system and the Internet. For example, on the telephone, after a customer
executes a traffic citation payment, they can be prompted to register and pay
for traffic school. On the Internet, the same prompts can be developed through
text links on the traffic citation payment page. We may receive referral fees
from the applicable service providers from whom our consumers purchase goods or
services.
Sales and Marketing
Focus on Signing Additional Government Clients
We are leveraging our IRS relationship and our ability to offer the
integration of personal federal and state income tax payments to attract new
state government clients. Similarly, we will use our relationship with state
governments to obtain new municipal clients. We intend to make significant
additions to our sales and marketing staff and customer service infrastructure.
Specific account executives are dedicated to the IRS and each state government
client. We are targeting municipal clients through direct sales, telemarketing
and targeted newsletters and other mailings. In addition, we publish a
quarterly newsletter that announces our new services and government clients,
which is distributed to our existing and potential government clients. We will
continue to make presentations and operate booths at IRS tax conferences and
other government entity gatherings.
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Focus on Increasing Utilization and Awareness
To date, our services have been publicized primarily by our government
clients and credit card issuers. Government publications and instruction
booklets have been used to present the payment option to potential consumer
users. For example, the IRS and state tax agencies have included our 1-888-
2PAY-TAXSM phone number in selected tax publications distributed to individuals
and tax preparation professionals, and, in the first half of April 1999, the
IRS profiled our electronic payment option on its electronic services web page.
A significant number of municipalities have provided our phone number as a
payment alternative for fines for traffic violations and parking citations. In
addition, major credit card issuers have also promoted our services because the
government market represents an under-tapped market for credit card
utilization. Our systems have been promoted through mailing inserts to all
American Express(R) and Discover(R) cardholders, and a significant number of
MasterCard(R) holders.
We intend to launch an advertising campaign targeted at consumer users to
broaden awareness of our electronic payment options. We will focus our campaign
on promoting use of our personal federal and state income tax payment services
during March and early April. In addition to increasing awareness for new
consumer users, we will also focus on promoting additional payment
opportunities to existing consumer users who have already used our services. We
believe these existing consumer users are more likely to use our services to
make other payments, and we will use our Web site to bring those services to
the attention of our customers.
Leverage Existing Relationships
We have relationships with Bank of America, American National Bank
(Illinois), Union Bank of California, Sun Trust and Novus Services implement
systems for their government clients. For example, Novus Services was awarded
the contract to provide personal income tax payment services for the State of
California and subcontracted the implementation of the system to us. Our
product implementation model and revenues as a subcontractor are identical to a
directly contracted account. We will look for strategic opportunities to
provide services to government entities in conjunction with these and other
partners.
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Our Operations and Technology
We provide complete electronic credit card payment services to government
entities. Our electronic payment conduits can perform all of the following
functions for our government clients:
. Capture unique identifiers for each transaction, such as citation
number, social security number, the consumer's identity and related
payment information.
. Perform real-time authorizations and postings, including fraud checking,
credit availability and address verification.
. Electronically create daily transaction files from all remote and local
systems.
. Compare the daily transaction files to credit card authorization
processor files--the "mirror balancing system". This validation process
assures credible data and reliable funds flow to government clients.
. Create a daily payment transaction activity report that is automatically
e-mailed or sent by facsimile to government clients.
. Create upload files from the mirror balancing system that are sent
electronically to government clients. These files are used by clients to
post payments to their internal systems.
[Graphic Display of Transaction Process for the Payment of Property Tax]
Our technological solutions and operations are focused on producing four
integrated results for our government clients and consumers: reliability,
security, audit capability and customer service/operational support. We
designed our technology and resulting operations around these core concepts.
Reliability
Our foremost service goal is reliability, which we seek to accomplish
through redundant hardware that provides disaster recovery and allows us to
implement seamless real-time backup and 100% system availability. Our Internet
payment servers are housed at Digex, Inc. facilities in Cupertino, California,
and in Beltsville, Maryland. The Cupertino site is our primary processing
location, containing a 72-hour capacity diesel generator. The Beltsville site
is expected to be able to instantly assume processing and provide 100% system
availability in the event the primary site is rendered inoperative.
Additionally, should we experience overloads due to unexpected volume
increases, our backup servers are designed to come into service without
interruption.
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Our interactive telephone systems have the same dual facility scheme as our
Internet systems. Our primary interactive telephone authorization and
processing facility is located in San Ramon, California, where our computers
have interchangeable power supplies and hard drives so that if a system fails,
the redundant systems should assume the workload. We also maintain a backup
facility in San Francisco, California, used for disaster recovery and
transaction overflows.
Transaction Security
We place a high priority on transaction security and fraud prevention. Our
goal is to maintain the confidentiality of all consumer credit card and related
information. For our Internet conduit delivery vehicle, we employ secured
socket layers for user security from the consumer's browser to our
8882paytax.com Web site. Taxpayer identity validations for credit card payments
are transmitted in an encrypted manner and are performed in accordance with
existing industry procedures.
We have several system functions that are designed to combat fraud. For
example, credit card authorizations are performed on-line and in real time. Our
system captures the cardholder's credit card account number, card expiration
date and billing statement mailing address and zip code, and requires the
cardholder to enter a three or four digit card verification code or card
verification value if it is present on the back of the card. Credit card
information is transmitted exclusively to the credit card processor. No one
outside of our system and the credit card processor's system receives the
information, including the IRS and other government clients.
Audit Capability
Our internally-developed mirror balancing system and reporting systems
provide us and our government clients with electronic audit capability. These
applications enable us to account for all transactions, to assure that data
transmissions to government clients are complete and reporting and update files
are accurate.
Customer Service
We provide automated customer service systems, such as the transaction
verification system, which allows consumers to confirm their transaction
posting. In addition, we employ customer service representatives who are
available to assist consumers with individual needs. We also provide a
"Frequently Asked Questions" feature on our Web site to answer common questions
that consumer users have. We intend to increase the number of customer service
representatives so that calls from consumers to our government clients or to
our credit card issuer partners relating to our services can be routed to us.
Payment Conduits
We provide two principal conduits for making payments to government clients:
via the interactive toll free telephone conduit and via the Internet.
. Interactive Toll Free Telephone Conduit. In order to facilitate payments
through our interactive telephone system, we first create a script of
voice prompts, record the script, and program possible responses to the
voice prompts into our computer database. We then establish a network
connection to the government client's database system and program the
connection to send and retrieve information to and from the client's
database system.
Payment and other information for our interactive telephone systems is
received from consumers who respond to voice prompts on our toll free
system by depressing touch-tone buttons on their telephones. Once the
convenience fee and other necessary information is conveyed to and
confirmed by the consumer, approval is obtained from the relevant
credit card issuing bank, and the payment is processed. Upon completion
of the payment, the user is given a receipt number.
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. Internet Conduit. In order to facilitate payments through our Internet
conduit, we first configure the client's profile settings and create a
screen and menu options or "links" within our Web site. Encrypted
payment data may then be sent between our server and the government
client's server. A "test mode" then follows until the client is
converted to "live" mode to enable payments to be processed.
Payment and other information for our Internet conduit is received from
consumers who retrieve the payment screen on their computer through our
secure Web site. Once their payment data is entered, approval is
obtained from the credit card issuing bank and the payment is processed
through our secure Web site. Upon completion of the payment, the user
is given a receipt number.
Competition
Alternative Payment Options
In addition to using our credit card payment services, consumer users have
the following payment options when making payments to government entities:
. Checks, money orders or cash. Payment by mailing checks, obtaining money
orders and paying in person are the traditional and currently the most
widely used methods for making payments to government entities.
. Credit card checks. Many of the issuing banks for Visa(R) and
MasterCard(R) distribute cash advance checks to their cardholders. In
March and early April, issuing banks generally promote the use of these
checks to pay taxes. Because these checks are treated as a cash advance,
they are generally a more expensive solution than our services. The
typical terms for a cash advance include a fee, and the advance starts
to accrue interest immediately at the issuing bank's applicable rate. In
addition, many issuing banks apply the consumer's payments to other less
expensive balances first. Moreover, cash advances typically do not
qualify for frequent flyer mileage programs or any other perquisites. In
contrast, payments made through our systems require a convenience fee,
but are treated as purchases subject to generally lower interest rates,
may not immediately accrue interest, and may qualify for various award
programs.
. Direct debit. Consumer users can arrange through their bank or otherwise
to have payments to government entities directly debited from their
checking or savings account. If arranged through the bank in which a
consumer user's checking or savings account is maintained, this service
is often provided free of charge.
Competing Providers of Credit Card Services for Payments to Government
Entities
In selecting a provider of outsourced electronic payment services, we
believe government entities consider the following:
. our ability to offer these services at no cost to the government entity;
. existing relationships and referrals from other government entities
currently using our services;
. our proven technology systems and implementation know-how;
. consumer usage of our services;
. the greatest possible consumer reach through both Internet and telephone
conduits;
. our relationships with financial institutions and credit card companies;
. our flexibility in adapting to unique government procedures;
. quality and convenience of our service;
45
. marketing and brand name recognition; and
. price of our services to consumers.
A limited number of competitors are currently involved in the market for
credit card payments to government entities. We believe we have a substantially
larger government client base, and have greater name recognition than our
primary competitors. There are, however, a number of larger credit card payment
and electronic commerce companies with similar technological capabilities, some
of which have greater resources than we do. We believe that the peculiarities
of the government market create barriers to entry and expansion that favor the
market leader. Our current competitors include the following:
. For personal federal income tax payments by credit card, we currently
have 100% market share for American Express(R) and MasterCard(R)
payments. The only current competitor is a joint development effort by
Intuit (TurboTax(R)) and Discover(R) card, for which Discover(R) card,
which had approximately 5% of the overall credit card market based on
total payment volume in 1998, is the only credit card accepted.
. Bank of America is the processing bank for a number of government
entities, which allows them to add processing services such as ours
without submitting to the standard request for proposal process. Bank of
America works with technology providers such as us to implement payment
systems. Bank of America also partners with Electronic Data
Systems/Phone Charge and Lockheed-IMS.
. National Information Consortium, Inc. provides Internet services for
government entities, and has indicated it intends to provide services to
government entities with respect to the payment of sales and use taxes.
Intellectual Property
We have registered the service marks 8882paytax.com SM, 1-888-2PAY-TAX SM
and US Audiotex SM. We protect our intellectual property rights through a
combination of trademark, service mark, copyright and trade secrets laws. We
cannot assure you that the steps we have taken to protect our intellectual
property rights, however, will be adequate to deter misappropriation of those
rights. We may not be able to detect unauthorized use of and take appropriate
steps to enforce our intellectual property rights. It may also be possible for
unauthorized third parties to copy certain portions of our proprietary
information or reverse engineer the proprietary information used in our
services.
In order to limit access to and disclosure of our proprietary information,
all of our employees are subject to confidentiality and invention assignment
arrangements, and we enter into nondisclosure agreements with third parties
that are material to our business.
Furthermore, we cannot assure you that third parties will not claim that we
have infringed upon their patents or other proprietary rights. We have been,
and from time to time we expect to be, subject to claims by third parties in
the ordinary course of business, including claims of alleged infringement of
service marks, trademarks, copyrights, patents and other intellectual property
rights of third parties. Although there has not been any litigation relating to
such claims to date, these claims and any resultant litigation would subject us
to significant liability for damages and could result in the invalidation of
our proprietary rights. In addition, even if we prevail, the litigation could
be time-consuming and expensive to defend and could result in a diversion of
our time and attention from our business, any of which could materially and
adversely affect our business, operating results and financial condition. Any
claims or litigation from third parties may also result in limitations on our
ability to use the service marks, trademarks and other intellectual property
subject to these claims or litigation, unless we enter into agreements with the
third parties. However, these agreements may be unavailable on commercially
reasonable terms, or not available at all.
We also intend to continue to license technology from third parties,
including our Web server and encryption technology. We cannot be certain that
these third-party content licenses will be available to us on
46
commercially reasonable terms or that we will be able to integrate the
technology into our products and services. These licenses may expose us to
increased risks. See "Risk Factors" on page 5.
We license our base interactive telephone hardware and software systems from
Alliance Systems Incorporated, which manufacturers the hardware and provides
the operating system and other development tools that we use. The license fee
is included in the cost of each system. Licenses for the processor software
that enables us to receive authorizations from credit card companies are
obtained from third party vendors each time a new government client account is
established. An additional license is acquired from Artisoft Inc. to allow us
to develop our interactive telephone applications. Finally, we obtain a
separate license for the credit card processing software that we license from
CyberSource Corp. with respect to each government client that is supported on
our Internet conduit.
Regulatory Matters
By virtue of Imperial Bank's ownership interest in us, and owing to the
nature of our business, we are subject to various regulatory requirements.
Imperial Bank is a California State chartered bank whose deposits are insured
by the Federal Deposit Insurance Corporation (FDIC). It is not a member bank of
the Federal Reserve System. Imperial Bank is subject to regulation and
supervision by the FDIC, as its primary federal regulator, as well as by the
California Department of Financial Institutions (the Department). Imperial
Bank, in turn, is a wholly owned subsidiary of Imperial Bancorp, a registered
bank holding company, which is subject to the provisions of the federal Bank
Holding Company Act of 1956, as amended (the BHC Act) and which is regulated
and supervised by the Board of Governors of the Federal Reserve System (the
Federal Reserve).
As long as Imperial Bank maintains a "controlling interest" in us--in
general, 25% or more common stock ownership--we will be subject to examination
and supervision by the FDIC as well as by the Department.
Section 24 of the Federal Deposit Insurance Act generally restricts and
prohibits insured state banks, such as Imperial Bank, and their subsidiaries
from engaging in activities and making types of investments that are not
permissible for national banks and their subsidiaries. The FDIC's regulations
under this statute define "activity permissible for a national bank" to include
any activity authorized for national banks under any statute, as well as
activities recognized as permissible for a national bank in regulations,
official circulars, bulletins, orders or written interpretations issued by the
Office of the Comptroller of the Currency (the OCC).
Our business involves processing payments by individuals to federal, state
and local governments pursuant to telephonic or electronic instruction. This
activity has long been recognized as part of or incidental to the business of
banking, and is permissible for a national bank and for majority owned
subsidiaries of national banks. The OCC has also broadly allowed national banks
to perform, provide, or deliver through electronic means and facilities any
activity, function, product or service that it is otherwise authorized to
perform, provide or deliver, and, in connection with those services, provide
unrelated services arising from excess capacity acquired or developed in good
faith for banking purposes. These activities may be conducted by national banks
directly, as well as through majority owned subsidiaries of national banks.
These activities may also be conducted through subsidiaries in which the
national bank holds less than 50% of the voting stock, provided, among other
things, the bank is able to prevent the subsidiary from engaging in
impermissible activities or may readily divest its ownership interest if the
subsidiary engages in such impermissible activities. Because we believe that
all of our current activities are permissible for national banks, we believe
this limitation has no effect on our business and upon Imperial Bank's
ownership interest in us at the present time.
For as long as Imperial Bank owns a voting equity interest in us which
equals 25% or more, or may otherwise be deemed by the regulatory authorities to
constitute "control", we will also be subject to certain California State and
federal statutes and regulations that apply to Imperial Bank. For example, we
will be required to limit any transactions we may have with "affiliates" of
Imperial Bank in the same manner as
47
Imperial Bank must limit its transactions with its affiliates. Among other
things, all such dealings with affiliates must be at arms' length.
We cannot guarantee that the banking laws will not be amended or construed
differently, or that new laws or regulations will not be adopted, the effect of
which could materially and adversely affect our business, operating results and
financial condition.
We are also subject to the laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code, and to the
electronic fund transfer rules embodied in Regulation E issued by the Federal
Reserve. The Federal Reserve's Regulation E implements the Electronic Fund
Transfer Act, which was enacted in 1978. Regulation E protects consumers
engaging in electronic transfers, and sets forth basic rights, liabilities and
responsibilities of consumers who use electronic money services and of
financial institutions that offer these services. For us, Regulation E sets
forth disclosure and investigative procedures. For consumers, Regulation E
establishes procedures and time periods for reporting unauthorized use of
electronic money transfer services and limitations on the consumer's liability
if the notification procedures are followed within prescribed periods. These
limitations on the consumer's liability may result in liability to us.
Given the expansion of the Internet commerce market, it is possible that the
Federal Reserve might revise Regulation E or adopt new rules for electronic
funds transfer affecting users other than consumers. Because of growth in the
Internet commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the Internet commerce market. It is
possible that Congress or individual states could enact laws regulating the
Internet commerce market. Initiatives are also pending in Congress which are
intended to protect individual privacy and would, among other things, regulate
the ability of financial institutions to use and share with affiliates and
unrelated third parties information concerning individuals developed in the
course of dealings with their customers, which is not currently subject to
regulation. If enacted, these laws, rules, and regulations could be imposed on
our business and industry and could have a material adverse effect on our
business, operating results and financial condition. Federal, local and state
laws and regulations may be adopted in the future to address issues such as
user privacy, pricing, online content regulation, taxation and the
characteristics and quality of online products and services.
Any new law or regulation relating to the Internet could have a material and
adverse effect on our business, operating results and financial condition.
Legal Proceedings
We are currently not involved in any material legal proceedings.
Employees
As of October 26, 1999, we had 35 employees. None of our employees are
covered by collective bargaining agreements. We believe that our relations with
our employees are good.
Facilities
Our corporate headquarters are located in San Ramon, California, in a 7,500
square feet leased facility. Our annual rent is approximately $192,000. Our
lease expires in August 2005. In addition, we lease two facilities where our
back-up systems are located. We believe that our existing facilities are
adequate for our current needs and that suitable additional space will be
available, on acceptable terms, when needed.
48
MANAGEMENT
Executive Officers and Directors
The following table sets forth information about our management, directors
and director nominees as of October 1, 1999:
Name Age Position
Thomas R. Evans......... 45 Chairman, Chief Executive Officer
Kenneth Stern........... 51 President and Director
Brian W. Nocco.......... 47 Chief Financial Officer and Director
Michael P. Presto....... 46 Chief Operating Officer
Michael Barrett......... 37 Chief Internet and Sales Officer
Steve Johnson........... 55 Senior Vice President, National Sales Manager
Bruce Zanca............. 39 Senior Vice President, Communications and Administration
Debbie Soleta........... 36 Vice President, Finance
Brad Belton............. 34 Vice President, Engineering
Angelica F. Carey....... 30 Vice President, Corporate Marketing
Kirstin K. Gunn......... 37 Vice President, Consumer Marketing
Andrew Cohan............ 45 Director Nominee
Christos Cotsakos....... 51 Director Nominee
George L. Graziadio,
Jr. ................... 80 Director Nominee
Vernon Loucks........... 65 Director Nominee
Lee E. Mikles........... 43 Director Nominee
Bruce Nelson............ 47 Director Nominee
Thomas R. Evans has served as our Chairman and Chief Executive Officer since
August 1999. From April 1998 to May 1999, Mr. Evans was the president and chief
executive officer of Geocities, Inc., which was acquired by Yahoo! Inc. in May
1999. From 1991 to April 1998, Mr. Evans served as president and publisher of
U.S. News and World Report, a magazine that reports on domestic and
international current events. From January 1997 to April 1998, Mr. Evans also
served as president and publisher of The Atlantic Monthly, a magazine that
features articles on art, literature, politics and technology. In addition,
from May 1995 to April 1998, Mr. Evans served as president and publisher of
Fast Company, a magazine that showcases business people and ideas. From 1990 to
1991, Mr. Evans served as vice president, advertising director of U.S. News and
World Report.
Kenneth Stern, our founder, has served as President and a Director since
1986, and is responsible for our operations, product designs and sales support.
From 1984 to 1986, Mr. Stern held a senior management position in software
development at Integral Systems. From 1976 to 1984, Mr. Stern was Vice
President of Systems Development at Tessereact Corporation.
Brian W. Nocco has served as our Chief Financial Officer and Director since
September 30, 1999. From May 1998 until joining us, Mr. Nocco was Executive
Vice President of Corporate Development at Imperial Bank, where he was involved
in our management and initial public offering process. From 1994 to 1998, Mr.
Nocco served as Senior Vice President and Manager of Audit and Compliance for
The Chubb Corporation, an insurance company headquartered in Warren, New
Jersey. From 1977 to 1994, Mr. Nocco served in various lending and financial
management positions, including Treasurer, at Continental Bank in Chicago,
Illinois.
Michael P. Presto has served as our Chief Operating Officer since September
1999, and is responsible for our technology, customer service and business
operations. Mr. Presto was Senior Vice President, Circulation and Business
Development at Curtis Circulation Company from April 1998 to September 1999,
where he was responsible for worldwide circulation sales and marketing
strategies. From January 1993 to April 1998,
49
Mr. Presto was Vice President of Consumer Marketing and Senior Vice President
of Consumer Marketing and Distribution for The New York Daily News during which
time he also served as President of Data Comm Services Inc., an affiliate
telemarketing/fulfillment customer service business. In addition, Mr. Presto
has held executive management positions at U.S. News and World Report and
Newsweek.
Michael Barrett has served as our Chief Internet and Sales Officer since
September, 1999. Mr. Barrett is responsible for marketing, sales, business
development and strategic partnerships with respect to our Internet initiative.
From May 1999 to September 1999, Mr. Barrett worked as an e-commerce consultant
for Yahoo!, Inc., and from September 1997 to May 1999, Mr. Barrett was Senior
Vice President of Sales and Strategic Partnerships at Geocities, Inc. In
addition, from November 1995 to September 1997, Mr. Barrett was Vice President
of Advertising for Disney Online, and he served as Publisher of Family Computer
Magazine for Family PC. Previously, he held sales management positions at
Meredith Publishing, Newsweek and Family PC.
Steve Johnson has served as Senior Vice President, National Sales Manager
since 1998, and is responsible for our sales organization. Prior to joining us,
Mr. Johnson was the Regional Director of Client Relationships and Business
Development at Electronic Data Systems since 1987.
Bruce Zanca joined us as Senior Vice President, Communications and
Administration in September 1999. Mr. Zanca oversees our corporate
communications, public relations and investor relations efforts. He also
manages the firm business administration infrastructure. Until June 1999, he
was Vice President of Communications at GeoCities, Inc., where he was in charge
of the public affairs, media relations, government affairs and investor
relations efforts. Prior to joining GeoCities, Mr. Zanca was Vice President of
Corporate Communications at U.S. News and World Report since June 1995. From
August 1994 to June 1995, Mr. Zanca was President of Zanca Associates, a full
service communications consulting and television production company. From
January 1989 to May 1989, Mr. Zanca served as a White House press secretary
under Marlin Fitzwater, and from May 1989 to September 1991, he served as a
public relations adviser to President George Bush.
Debbie Soleta has served as Vice President, Finance since 1992, and is
responsible for our accounting and overseeing our administrative staff. Ms.
Soleta also served as a director from January 1998 to August 1999. Prior to
joining us, Ms. Soleta was an accountant with a firm in Fremont, California,
from 1989 to 1991.
Brad Belton joined us in November 1992 as Senior Software Engineer. Since
January 1994, he has served as Vice President, Engineering, and is responsible
for our database systems development. From 1988 to November 1992, Mr. Belton
held various positions with Zendex Corporation, a manufacturer of micro
controllers and computer equipment, including the position of Senior Software
Engineer and Manager. Mr. Belton received his B.S. degree in Software
Engineering from Oregon Institute of Technology.
Angelica F. Carey joined us as Vice President, Corporate Marketing in
September 1999. Ms. Carey is responsible for managing our corporate marketing,
as well as promoting our services to our government clients and business
partners and contributing to our sales, public relations and strategic
partnership efforts. From July 1998 to July 1999, Ms. Carey was the Director of
Ad Sales Marketing at GeoCities, Inc. Prior to GeoCities, Ms. Carey was also
involved in the launch and development of the award-winning new business
magazine Fast Company, where she worked as Marketing Manager from 1995 to 1998.
From October 1993 to January 1996, Ms. Carey was a Senior Marketing Writer at
U.S. News and World Report.
Kristen K. Gunn joined us as Vice President, Consumer Marketing in September
1999. In addition to managing our relationships with strategic marketing
partners, Ms. Gunn will be overseeing the development of our brand image and
consumer marketing campaign. Before joining us, Ms. Gunn was the Director of
Visitor Marketing at GeoCities, Inc. where she was responsible for marketing
over 4 million homepages and promoting
50
GeoCities as a visitor destination. At GeoCities, Ms. Gunn also worked on
creating the company's initial corporate branding campaign. From 1993 to 1998,
Ms. Gunn served as the Manager of New Media at U.S. News and World Report. As a
member of the magazine's first new media team, Ms. Gunn worked on the
development, construction and launch of three Web sites in addition to managing
the sites' advertising and business development relationships.
Andrew Cohan will join our board of directors upon consummation of the
offering. Since September 1999, he has been Chairman and Chief Executive
Officer of Artist Marketing Corp., a marketing company for artists and
entertainment/celebrity figures. From August 1997, Mr. Cohan was Senior Vice
President, Worldwide Entertainment, Licensing and Marketing for Sony Signature,
an entertainment licensing and marketing company. From January 1996 to July
1997, Mr. Cohan was Senior Vice President, Chief Merchandising Officer for
Beverages and More, a start-up beverages retailer. Before that, Mr. Cohan was
Vice President, Merchandising for Emerson Radio Corporation since February
1994.
Christos M. Cotsakos will join our Board of Directors upon consummation of
the offering. Mr. Cotsakos is the Chairman of the Board of Directors and Chief
Executive Officer of E*TRADE Group, Inc., an electronic broker/dealer. Prior to
joining E*TRADE, he served as President, Co-Chief Executive Officer, Chief
Operating Officer and a Director of A.C. Nielsen, Inc. from March 1995 to
January 1996, as President and Chief Executive Officer of Nielsen International
from September 1993 to March 1995, and as President and Chief Operating Officer
of Nielsen Europe, Middle East and Africa from March 1992 to September 1993.
Mr. Cotsakos joined Nielsen after 19 years with the Federal Express
Corporation, where he held a number of senior positions. Mr. Cotsakos also
serves as a director of several technology companies in both the public and
private sector.
George L. Graziadio, Jr. will join our Board of Directors upon completion of
this offering. Mr. Graziadio has been the Chairman of the Board, President and
Chief Executive Officer of Imperial Bancorp, a bank holding company, since
1969. Mr Graziadio is engaged as an owner or partner in many other business
activities, primarily in the real estate industry. He also serves on the board
of directors of various subsidiaries of Imperial Bancorp, including the board
of directors of Imperial Bank, our majority stockholder. He serves on the board
of directors of Coastcast Corp., a manufacturer of golf clubheads, orthopedic
implants and surgical tools. Mr Graziadio is the uncle of Lee E. Mikles, one of
our director nominees.
Vernon R. Loucks Jr. will join our Board of Directors upon consummation of
the offering. Mr. Loucks is the Chairman of the Board of Directors of Baxter
International, Inc., a developer, distributor and manufacturer of health care
products and services, and previously served as Baxter's Chief Executive
Officer from 1980 through 1998. Mr. Loucks also serves as a director of
Affymetrix, Inc., Anhauser-Busch Companies, Inc., The Dun & Bradstreet
Corporation, Emerson Electric Company and The Quaker Oats Company.
Lee E. Mikles will join our Board of Directors upon completion of this
offering. Mr. Mikles is the chairman of Mikles/Miller Management Inc., an
investment advisor and Chairman of Mikles/Miller Securities, LLC, a registered
broker/dealer. He has has been a director of Imperial Bancorp since 1996 and
its wholly-owned subsidiary, Imperial Bank, since 1993. Mr. Mikles also serves
on the board of directors of Coastcast Corp., and Boss Holdings, Inc. Mr.
Mikles is the nephew of George L. Graziadio, Jr., one of our director nominees.
Bruce Nelson will join our Board of Directors upon consummation of the
offering. Mr. Nelson most recently was Vice Chairman of Young & Rubicam Inc.
Prior to that position, he worked at McCann-Erickson Worldwide for 19 years in
various positions, including as Director of Worldwide Accounts, Director of
Strategy for Worldwide Accounts and Creative Director for Worldwide Accounts.
51
Board of Directors and Committees
Our board of directors is composed of up to nine members. Currently there
are six vacancies. Within 30 days following the consummation of this offering,
we intend to fill those vacancies with individuals, including one individual
designated by Kenneth Stern, who will be neither our officers nor employees.
Within 30 days following the completion of this offering, our board of
directors will establish an Audit Committee and a Compensation Committee.
Effective upon their joining our board of directors, certain of our independent
directors will serve as the members of the Audit Committee and the Compensation
Committee. The Audit Committee's principal functions will include making
recommendations to our board of directors regarding the annual selection of our
independent auditors, reviewing the proposed scope of each annual audit and
reviewing the recommendations of our independent auditors resulting from the
audit of our consolidated financial statements. The Compensation Committee's
principal function will be to establish the compensation of our Chief Executive
Officer and other senior officers and to establish and administer our
compensation programs, including the grant of awards under our stock incentive
plan. See "--1999 Stock Incentive Plan" on page 53. Our board of directors may
at various times establish other committees to facilitate the management of our
company.
Director Compensation
Prior to this offering, directors received no compensation for their service
on our board of directors. Upon completion of this offering, directors who are
not our employees will receive an annual retainer of $20,000. Directors will be
reimbursed for out-of-pocket expenses incurred in connection with their service
as directors. In addition, each non-employee director will receive, upon
consummation of this offering, options to purchase 75,000 shares of our common
stock at an exercise price per share equal to the initial public offering
price. Directors who are our officers or employees will not receive any
additional compensation for their services as directors. See "--1999 Stock
Incentive Plan" on page 53.
Executive Compensation
The following table sets forth information with respect to the compensation
earned during the year ended December 31, 1998 by our Chief Executive Officer
and our two other most highly compensated executive officers (collectively, the
Named Executive Officers). We did not pay any bonuses in 1998. Perquisites and
other personal benefits, securities and property did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported for any of the
Named Executive Officers.
Summary Compensation Table
Other
Name and Principal Position Salary Compensation
Thomas Evans(1).................................. $ -- $ --
Chairman and Chief Executive Officer
Kenneth Stern.................................... 144,000(/2/) --
President
Brian W. Nocco(3)................................ -- --
Chief Financial Officer
- --------
(1) Mr. Evans became our Chairman and Chief Executive Officer in August 1999.
His annual base salary is $200,000. Please see "--Employment Agreements" on
page 55 for a detailed description of Mr. Evans's employment agreement.
(2) Effective August 1999, Mr. Stern's annual base salary is $215,000. Please
see "--Employment Agreements" on page 55 for a detailed description of Mr.
Stern's employment agreement.
(3) Mr. Nocco became our Chief Financial Officer as of September 30, 1999. His
annual base salary is $200,000. Please see "--Employment Agreements" on
page 55 for a detailed description of Mr. Nocco's employment agreement.
52
1999 Stock Incentive Plan
In August 1999, our board of directors adopted the 1999 Stock Incentive
Plan. We have reserved a total of 6,900,000 shares of common stock for issuance
under the plan. The purpose of the plan is to promote our long-term growth and
profitability by providing individuals with incentives to improve stockholder
value and contribute to our growth and financial success, and by enabling us to
attract, retain and reward the best available persons for positions of
substantial responsibility. The plan provides for the grant of both:
. non-qualified stock options; and
. incentive stock options within the meaning of Section 422 of the
Internal Revenue Code.
Participation in the plan is open to our key employees, officers and
directors. Key employees and officers may be granted incentive stock options
and non-qualified stock options. Directors who are not our employees may only
receive non-qualified stock options.
We have granted non-qualified stock options to purchase 4,488,012 shares of
our common stock to the following individuals and groups:
Name Number of Shares
Thomas Evans............................................. 1,325,460
Kenneth Stern............................................ 212,073
Brian Nocco.............................................. 397,638
All executive officers as a group (11 persons)........... 4,320,999
All others (5 persons)................................... 167,013
All of the above options are non-qualified stock options, have a term of ten
years and an exercise price of $1.33 per share.
We have granted stock options to Mr. Evans to purchase up to 1,325,460
shares of our common stock and to other executive officers and employees to
purchase up to 2,499,822 shares of our common stock which are exercisable
immediately. All of these shares will be non-transferable and subject to our
right to repurchase those shares at a price of $1.33 per share. We may exercise
this right at any time during the 30-day period following termination of
employment for reasons other than death, disability or a change in control. Our
repurchase right will expire with respect to one-third of the option shares on
the first anniversary of the grant date. Thereafter, our right will expire on a
cumulative basis with respect to the remaining shares on a monthly basis on the
last day of each of the next 24 consecutive months. Further, upon completion of
this offering, we will grant Mr. Evans an additional option to acquire shares
of our common stock at an exercise price of $1.33 per share so that, when
combined with the option described above, Mr. Evans will have options to
acquire a number of shares of our common stock as is equal to a total of five
percent (5%) of our common stock outstanding at that time, on a fully diluted
basis, including the options granted to Mr. Evans.
In addition, upon completion of this offering, we will grant other executive
officers and employees additional options to acquire shares of our common stock
at an exercise price of $1.33 per share so that, when combined with the options
described above, these individuals will have options to acquire a number of
shares of our common stock as is equal to a total of 9.43% of our common stock
outstanding at that time, on a fully diluted basis, including the options
granted to these individuals.
We have also granted 662,730 stock options to purchase shares of our common
stock to executive officers and employees, other than Mr. Evans, which will
vest on the date of this offering. Kenneth Stern has been delegated the
authority to grant, upon completion of this offering, any employees selected by
him additional options to acquire shares of our common stock at an exercise
price of $1.33 per share so that, when combined with the options already
granted, these employees selected by Mr. Stern to receive options will have
options to acquire a number of shares of our common stock equal to a total of
two and one-half percent
53
(2.5%) of our common stock outstanding at that time, on a fully diluted basis,
including the options granted to these employees.
In addition, Mr. Stern has also been delegated the authority to grant, upon
completion of this offering, non-qualified stock options to any of our
employees to purchase shares of our common stock at an exercise price equal to
the initial public offering price so that they will have options to acquire a
number of shares of common stock equal to a total of two and one-half percent
(2.5%) of our common stock outstanding at that time, on a fully diluted basis,
including the options granted to these employees.
The plan is administered by the compensation committee of our board of
directors. The compensation committee has the authority to:
. determine whether and to what extent incentive stock options and/or non-
qualified stock options will be granted to eligible key employees;
. select key employees and outside directors to whom options will be
granted;
. determine the number of shares of common stock to be covered by each
option granted;
. determine the exercise price, vesting schedule and all other terms and
conditions of stock options granted;
. determine the fair market value of a share of common stock on a given
date;
. provide that all shares of common stock received by an optionee upon the
exercise of a stock option prior to the consummation of this offering
shall be subject to a right of first refusal, which requires the option
holder to offer to us any shares that the option holder wishes to sell;
and
. amend the terms of any option, prospectively or retroactively, provided
that no amendment will impair the rights of the option holder without
his or her written consent.
For incentive stock options to qualify under Section 422 of the Internal
Revenue Code, they:
. must have an exercise price at least equal to fair market value on the
date of grant; and
. may not be exercisable more than ten years from the date of grant.
If any of our employees or any employee of our subsidiaries owns over 10% of
the combined voting power of all classes of our stock on the date of grant, the
incentive stock options granted to these employees:
. must have an exercise price not less than 110% of the fair market value;
and
. may not be exercisable more than five years from the date of grant.
The exercise price of any option may be paid:
. in cash;
. through a "cashless exercise";
. by tendering of shares of common stock;
. by a combination of cash and shares; or
. by any other means approved by the compensation committee.
Our board of directors may terminate, amend or modify the plan at any time,
except that all awards made prior to termination of the plan will remain in
effect until they have been satisfied or terminated in accordance with the
terms of the plan and such awards.
54
Employment Agreements
We have entered into an employment agreement with Thomas Evans, our Chairman
and Chief Executive Officer. The employment agreement provides for an annual
base salary of $200,000. In addition, under the terms of his agreement, Mr.
Evans will receive a one-time bonus of $500,000, $250,000 of which has been
paid to date, and $250,000 of which will be paid no later than the first
anniversary of the commencement of his employment with us. Mr. Evans was also
granted options to purchase 1,325,460 shares of our common stock at $1.33 per
share under the 1999 Stock Incentive Plan. We agreed to grant Mr. Evans
additional options under our 1999 Stock Incentive Plan at an exercise price of
$1.33 per share upon consummation of this offering so that, at that time, he
would hold options, including the initial grant of options to purchase
1,325,460 shares, to purchase shares of our common stock equal to a total of 5%
of our common stock outstanding, on a fully diluted basis, including the
options granted to Mr. Evans. Under the terms of the employment agreement,
Imperial Bank has guaranteed that the "value"--as defined in the agreement--of
Mr. Evans' vested options will be worth $10,000,000 on or before the third
anniversary of the date of the agreement, or Imperial Bank will pay Mr. Evans
an amount equal to the difference between $10,000,000 and the highest value of
the vested options on or before the third anniversary. If Mr. Evans' employment
is terminated by us without "cause" or if he terminates his employment for
"good reason," including a "change in control," as these terms are defined in
the agreement, we will be required to pay him his base salary and benefits for
one year, and all of his options will vest immediately. If Mr. Evans'
employment is terminated by us with cause, we will be required to pay him any
compensation, benefits or reimbursements accrued through the date of
termination. Mr. Evans' employment under the agreement may be terminated by us
on 30 days' notice without cause, or immediately upon notice with cause, and
may be terminated by Mr. Evans on 60 days' notice without good reason, or
immediately for good reason.
We have entered into an employment agreement with Kenneth Stern, pursuant to
which Mr. Stern has agreed to serve as our President and a member of our board
of directors until August 23, 2006. The employment agreement provides for an
annual base salary of $215,000 and a minimum annual bonus of $100,000. Mr.
Stern has the right to take early retirement at any time after the third
anniversary of the date of the agreement, upon which we would be required to
pay him his base salary and bonus through August 23, 2006. If Mr. Stern's
employment is terminated by us without "cause" or if he terminates his
employment for "good reason," as these terms are defined in the agreement, we
will be required to pay him his base salary and bonus through August 23, 2006,
and provide benefits through December 31, 2002 or for one year from the date of
termination, whichever is later. Additionally, Mr. Stern would be entitled to
retain his position as a director through August 23, 2006, provided that he and
Beranson Holdings, Inc. own or control an aggregate of 10% of our outstanding
common stock. If Mr. Stern's employment is terminated by us with cause, we will
be required to pay him any compensation, benefits or reimbursements accrued
through the date of termination. Mr. Stern's employment under the agreement may
be terminated by us on 30 days' notice without cause, or immediately upon
notice with cause, and may be terminated by Mr. Stern on 120 days' notice
without good reason, or immediately for good reason.
We have entered into an employment agreement with Brian Nocco, pursuant to
which Mr. Nocco will serve as our Chief Financial Officer and a member of our
board of directors. The employment agreement provides for an annual base salary
of $200,000, as well as reimbursement for relocation expenses. In addition,
under the terms of his agreement, Mr. Nocco will receive a minimum bonus of
$100,000 in 2000. Mr. Nocco was also granted options to purchase 397,638 shares
of our common stock at $1.33 per share under the 1999 Stock Incentive Plan. We
agreed to grant Mr. Nocco additional options under our 1999 Stock Incentive
Plan at an exercise price of $1.33 per share upon consummation of this offering
so that, at that time, he would hold options, including the initial grant of
options to purchase 397,638 shares, to purchase shares of our common stock
equal to a total of 1.5% of our common stock outstanding, on a fully diluted
basis, including the options granted to Mr. Nocco. If Mr. Nocco's employment is
terminated by us without "cause" or if he terminates his employment for "good
reason," including a "change in control," as these terms are defined in the
agreement, we will be required to pay him his base salary and benefits for one
year, and all of his options will vest immediately. If Mr. Nocco's employment
is terminated by us with cause, we will be required to pay him any
55
compensation, benefits or reimbursements accrued through the date of
termination. Mr. Nocco's employment under the agreement may be terminated by us
on 30 days' notice without cause, or immediately upon notice with cause, and
may be terminated by Mr. Nocco on 60 days' notice without good reason, or
immediately for good reason.
We have entered into an employment agreement with Michael P. Presto, our
Chief Operating Officer. The employment agreement provides for an annual base
salary of $200,000. In addition, under the terms of his agreement, Mr. Presto
will receive a minimum bonus of $100,000 in 2000. Mr. Presto was also granted
options to purchase 662,730 shares of our common stock at $1.33 per share under
the 1999 Stock Incentive Plan. We agreed to grant Mr. Presto additional options
under our 1999 Stock Incentive Plan at an exercise price of $1.33 per share
upon consummation of this offering so that, at that time, he would hold
options, including the initial grant of options to purchase 662,730 shares, to
purchase shares of our common stock equal to a total of 2.5% of our common
stock outstanding, on a fully diluted basis, including the options granted to
Mr. Presto. If Mr. Presto's employment is terminated by us without "cause" or
if he terminates his employment for "good reason," including a "change in
control," as these terms are defined in the agreement, we will be required to
pay him his base salary and benefits for one year, and all of his options will
vest immediately. If Mr. Presto's employment is terminated by us with cause, we
will be required to pay him any compensation, benefits or reimbursements
accrued through the date of termination. Mr. Presto's employment under the
agreement may be terminated by us on 30 days' notice without cause, or
immediately upon notice with cause, and may be terminated by Mr. Presto on 60
days' notice without good reason, or immediately for good reason.
We have entered into an employment agreement with Michael Barrett, our Chief
Internet and Sales Officer. The employment agreement provides for an annual
base salary of $200,000. In addition, under the terms of his agreement, Mr.
Barrett will receive a minimum bonus of $100,000 in 2000. Mr. Barrett was also
granted options to purchase 795,276 shares of our common stock at $1.33 per
share under the 1999 Stock Incentive Plan. We agreed to grant Mr. Barrett
additional options under our 1999 Stock Incentive Plan at an exercise price of
$1.33 per share upon consummation of this offering so that, at that time, he
would hold options, including the initial grant of options to purchase 795,276
shares, to purchase shares of our common stock equal to a total of 3% of our
common stock outstanding, on a fully diluted basis, including the options
granted to Mr. Barrett. If Mr. Barrett's employment is terminated by us without
"cause" or if he terminates his employment for "good reason," including a
"change in control," as these terms are defined in the agreement, we will be
required to pay him his base salary and benefits for one year, and all of his
options will vest immediately. If Mr. Barrett's employment is terminated by us
with cause, we will be required to pay him any compensation, benefits or
reimbursements accrued through the date of termination. Mr. Barrett's
employment under the agreement may be terminated by us on 30 days' notice
without cause, or immediately upon notice with cause, and may be terminated by
Mr. Barrett on 60 days' notice without good reason, or immediately for good
reason.
The employment agreements generally contain confidentiality provisions and
covenants not to compete during the term of employment and for one year after
termination of employment.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, we have had no separate compensation committee or
other board committee performing equivalent functions. Upon filling the
vacancies on our board of directors, our board of directors will create a
Compensation Committee composed solely of outside directors. During the year
ended December 31, 1998, none of our executive officers served:
. as a member of the compensation committee, or other board committee
performing equivalent functions or, in the absence of any such
committee, the entire board of directors, of another entity, one of
whose executive officers served on our board of directors;
. as a director of another entity, one of whose executive officers served
on our board of directors; or
. as a member of the compensation committee, or other board committee
performing equivalent functions or, in the absence of any such
committee, the entire board of directors, of another entity, one of
whose executive officers served as a director of our company.
56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our stockholders, Imperial Bank and Beranson Holdings, Inc., a company
affiliated with Kenneth Stern, our President, have from time to time made
advances to us to bridge temporary cash shortages and fund certain capital
expenditures, particularly purchases of equipment and other technology required
to support the expansion of our IRS and state income tax relationships. These
advances are made under lines of credit from Imperial Bank and Beranson
Holdings, Inc. in the combined amount of $2.8 million and are evidenced by
promissory notes bearing interest at a floating rate equal to Imperial Bank's
prime rate plus 2% per annum. The notes mature on the earlier of December 31,
2000 or the date that is 30 days after the date of the completion of our
initial public offering. As of October 26, 1999, the aggregate principal and
interest accrued on these notes was $2.3 million. We expect to repay the
balance of the promissory notes, together with the accrued interest, from the
net proceeds of this offering. We do not believe we would have been able to
obtain financing from an unaffiliated third party on similar or more favorable
terms.
During the past year, we have received the following advances from our
stockholders:
. August 16, 1999; $200,000 from Imperial Bank and $50,000 from Beranson
Holdings, Inc.
. August 24, 1999; $1,105,600 from Imperial Bank and $276,400 from
Beranson Holdings, Inc.
. October 1999; $560,000 from Imperial Bank and $140,000 from Beranson
Holdings, Inc.
In January 1998, Imperial Bank agreed to increase its ownership interest of
U.S. Audiotex LLC from 20% to 80% by purchasing a 60% membership interest, or
75% of Beranson Holdings, Inc.'s membership interest, from Beranson Holdings,
Inc. for $3,010,000, of which $2,510,000 was immediately payable to Beranson
Holdings, Inc. The purchase price balance of $500,000 was payable according to
the following structure:
. In order to fund our cash flow needs, Imperial Bank made a capital
contribution of $500,000 to us, bearing interest at 10% per annum, in
return for a preferred membership interest.
. Imperial Bank's preferred membership interest was subject to mandatory
redemption upon the formation of Official Payments Corporation.
. Imperial Bank was obligated to forward any redemption payments it
received from us to Beranson Holdings, Inc. as an additional payment for
its purchase of the membership interest.
For accounting purposes, Imperial Bank's preferred membership interest was
treated by us as a loan from Beranson Holdings, Inc. to us. Upon our formation
on August 24, 1999, the mandatory redemption of Imperial Bank's preferred
membership interest was triggered and this "loan," including $82,000 of accrued
interest, was repaid to Beranson Holdings, Inc. out of the proceeds of the
advances made to us on that date by Imperial Bank and Beranson Holdings, Inc.
Imperial Bank is one of three merchant banks we use to process credit card
transactions and perform traditional merchant credit card settlement services.
Under our agreement with Imperial Bank for processing and settlement services,
Imperial Bank is authorized to retain from our sales revenues customary
merchant discount fees usually charged for similar processing services, on a
product by product basis. During the nine months ended September 30, 1999, we
paid Imperial Bank approximately $1.6 million for performing these processing
and settlement services. We believe Imperial Bank is providing these services
on terms no less favorable to us than could be obtained from unaffiliated third
parties. We expect that Imperial Bank will continue to provide these services
to us following this offering.
Imperial Bank has provided human resource services and other assistance to
us. These services and assistance include payroll processing and benefits
administration, including the administration of our 401(k) plan and other
benefit programs, and employee recruiting. Like all wholly-owned and majority-
owned subsidiaries of Imperial Bank, we pay a pass-through charge, based on the
total number of employees, for these services. During the nine months ended
September 30, 1999, we paid Imperial Bank a fee of $7,000 for these
57
services. We believe Imperial Bank is providing these services on terms no less
favorable to us than could be obtained from unaffiliated third parties. Upon
completion of this offering, Imperial Bank will continue to provide these
services to us for the foreseeable future.
Imperial Bank and Beranson Holdings, Inc. have guaranteed the performance of
our obligations under two equipment leases. Upon completion of this offering,
we expect that Imperial Bank and Beranson Holdings, Inc. will be released as
the guarantors of our lease obligations.
We were originally organized as a California limited liability company
("LLC"). In anticipation of our initial public offering, we merged the LLC with
and into a Delaware corporation, as a result of which all the assets and
liabilities of the LLC were transferred to the corporation. Prior to the
merger, Imperial Bank and Beranson Holdings, Inc. were the only members of the
LLC and owned membership interests representing 80% and 20%, respectively, in
the LLC. Since the merger, Imperial Bank and Beranson Holdings, Inc. hold a
corresponding percentage ownership interest in us, with Imperial Bank owning
12,000,000 shares of our common stock and Beranson Holdings, Inc. owning
3,000,000 shares of our common stock.
58
PRINCIPAL STOCKHOLDERS
This table sets forth information regarding the beneficial ownership of our
common stock as of September 30, 1999 by:
. each person known to us to own beneficially more than 5% of our
outstanding common stock;
. each of our directors;
. each of our executive officers listed in the summary compensation table
in the "Management" section on page 52; and
. all of our directors and executive officers as a group.
The calculations of the percentages in the following table are based on
15,000,000 shares of our common stock outstanding prior to the closing of this
offering, and 20,000,000 shares outstanding immediately following the
completion of this offering. Unless otherwise noted, each of the persons listed
below has sole voting and investment power with respect to their shares.
Stockholder Name and Shares Beneficially Shares Beneficially
Address(/1/) Owned Prior to Offering Owned After Offering
- -------------------- ------------------------------------------------------
Number Percentage Number Percentage
Imperial Bank.......... 12,000,000 80.0% 12,000,000 60.0%
c/o Imperial Bank
Building
9920 South La Cienega
Boulevard
Inglewood, CA 90301
Beranson Holdings,
Inc.(1)............... 3,000,000 20.0 3,000,000 15.0
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Thomas R. Evans........ 1,325,460(/2/) 8.1 1,325,460 6.2
c/o Official Payments
Corporation
445 Park Avenue, 10th
Floor
New York, New York
10022
Kenneth Stern(1)....... 3,212,073 21.1 3,212,073 15.9
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Brian Nocco............ 397,638 2.6 397,638 1.9
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
George L. Graziadio,
Jr. .................. -- -- 75,000 *
c/o Imperial Bank
Building
9920 South La Cienega
Boulevard
Inglewood, CA 90301
Lee E. Mikles.......... -- -- 75,000 *
c/o Imperial Bank
Building
9920 South La Cienega
Boulevard
Inglewood, CA 90301
Andrew Cohan........... -- -- 75,000 *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Christos Cotsakos...... -- -- 75,000 *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Vernon R. Loucks Jr.... -- -- 75,000 *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Bruce Nelson........... -- -- 75,000 *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
All executive officers
and directors as a
group................. 7,320,999 37.9 7,770,999 31.4
(17 persons)
59
- --------
* Less than 1%.
(1) Beranson Holdings, Inc. is a company controlled by Mr. Stern and his wife,
Michaella Stern, as joint tenants. Lauren Stern, a minor, is the only other
stockholder. Accordingly, Mr. Stern is deemed to beneficially own the
shares of our common stock owned by Beranson Holdings, Inc.
(2) Consists of 1,325,460 shares of our common stock underlying presently
exercisable options, equal to 5% of our common stock outstanding after
this offering on a fully diluted basis. For a discussion of Mr. Evans's
arrangement, see "Management--Employment Agreements" on page 55.
60
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 150,000,000 shares of common stock,
15,000,000 shares of which are issued and outstanding, held by two stockholders
of record. An additional 6,900,000 shares of common stock are issuable upon
exercise of outstanding stock options under our 1999 Stock Incentive Plan.
The following description provides a summary of the material rights and
limitations relating to ownership of our capital stock. For a complete legal
description of our capital stock, you should refer to our certificate of
incorporation and bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
Upon completion of this offering, there will be no preemptive, conversion,
subscription, redemption or repurchase rights associated with the shares of
common stock. Each holder of common stock is entitled to one vote for each
share owned of record on matters submitted to a vote of the stockholders.
Holders of common stock are not entitled to cumulative voting rights in the
election of directors. If we are liquidated, the holders of common stock are
entitled to participate ratably in the assets available for distribution after
satisfaction of all claims of our creditors.
The holders of common stock are entitled to receive ratably such dividends
as our board of directors, in its discretion, may declare out of funds legally
available therefor. Under the Delaware General Corporation Law (the DGCL),
dividends may be paid out of either:
. surplus as defined in the DGCL; or
. net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year.
See "Dividend Policy" on page 16.
Bylaw Provisions
Our bylaws provide that our board of directors will consist of not less than
3 nor more than 9 members. The exact number of directors constituting our board
can be fixed and changed from time to time by our board. The directors will be
elected at the annual meeting of stockholders or any special meeting of
stockholders and each director so elected will hold office until the next
annual meeting or until his successor is elected and qualified or until his
earlier resignation or removal. Our bylaws may be amended by the affirmative
vote of 80% of our stockholders or the affirmative vote of two-thirds of our
board of directors. See "Risk Factors" on page 5.
Anti-Takeover Matters
Provisions of the DGCL
Section 203 of the DGCL generally restricts a corporation from entering into
certain business combinations with an interested stockholder (defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock) or its affiliates, unless:
. the transaction is approved by the board of directors of the corporation
prior to the date such person or entity became an interested
stockholder;
. the interested stockholder acquired 85% of the corporation's stock,
excluding voting stock owned by directors and officers and certain
employee stock plans of the corporation, in the same transaction in
which the interested stockholder exceeds 15%; or
61
. the business combination is approved by the board of directors and by a
vote of two-thirds of the outstanding voting stock not owned by the
interested stockholder.
The DGCL provides that a corporation may elect not to be governed by
Section 203. At present, we do not intend to make such an election and we
intend to avail ourselves of the rights afforded by Section 203. The effect of
Section 203 may be to render more difficult a change in control of our
company.
Charter Provisions
Our certificate of incorporation provides that stockholders may not take
action by written consent, but only at a duly called annual or special meeting
of stockholders. Special meetings of our stockholders may be called only by
our Chairman or a majority of our directors. Our certificate of incorporation
also includes supermajority voting provisions. The affirmative vote of 80% of
our stockholders is required for the removal of our directors, the adoption,
amendment or repeal of our bylaws, and the consummation of some business
combinations with any related person, which is defined as any person or entity
who, together with its affiliates, owns 10% of our voting stock. However, the
supermajority requirement will not apply to business combinations with related
persons if the combinations are approved by a majority of our directors, or if
our stockholders receive the requisite type and amount of consideration.
Limitation of Director and Officer Liability
Our certificate of incorporation and bylaws provide that, to the extent not
prohibited by law, we will indemnify any person who is or was made, or
threatened to be made, party to any threatened, pending or completed action,
suit or proceeding, by reason of the fact that such person is or was our
director or officer, or is or was serving in any capacity at our request for
any other corporation, partnership or other enterprise, against judgments,
fines, penalties, excise taxes, amounts paid in settlement costs, charges and
expenses, including attorneys' fees. Persons who are not directors or officers
of our company may be similarly indemnified in respect of service to our
company to the extent our board of directors at any time specifies such
persons are entitled to the benefits of the indemnification provisions
contained in our certificate of incorporation or bylaws. Our certificate of
incorporation provides for the elimination of personal liability to our
company or our stockholders for monetary damages for breach of fiduciary duty
as a director, except for:
. any breach of the director's duty of loyalty to our company or our
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. certain unlawful dividends or redemptions as provided under Section 174
of the DGCL; or
. any transaction from which the director derived an improper personal
benefit.
Transfer Agent
American Stock Transfer & Trust Company will be the transfer agent and
registrar for the common stock.
62
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our securities.
Upon completion of this offering, there will be 20,000,000 shares of our common
stock outstanding, assuming there is no exercise of the Underwriters' over-
allotment option or options outstanding under our stock option plans. Of these
shares, the 5,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
Sales of Restricted Shares
The remaining 15,000,000 shares of common stock are deemed "restricted
securities" under Rule 144. Upon expiration of the Lock-Up Agreements described
below, these shares of common stock will be available for sale in the public
market, subject to the provisions of Rule 144 under the Securities Act.
The Lock-Up Agreements provide that, for a period of 180 days after the date
of this prospectus, our stockholders prior to this offering will not sell,
offer, contract or grant any option to sell, pledge, transfer, establish an
open put equivalent position or otherwise dispose of any shares of common
stock, any options to purchase shares of common stock or any shares convertible
into or exchangeable for shares of common stock, owned directly by such persons
or with respect to which they have the power of disposition, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities, as that term is defined in
Rule 144, for at least one year from the later of the date such securities were
acquired from us or, if applicable, the date they were acquired from one of our
Affiliates is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of 1% of the then outstanding shares of
common stock--200,000 shares immediately after this offering--or the average
weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule
144(k), if a period of at least two years has elapsed between the later of the
date restricted securities were acquired from us or, if applicable, the date
they were acquired from one of our Affiliates, a stockholder who is not an
Affiliate of us at the time of sale and has not been an Affiliate of us for at
least three months prior to the sale is entitled to sell the shares immediately
without compliance with the foregoing requirements under Rule 144.
Securities issued in reliance on Rule 701--such as shares of common stock
acquired pursuant to the exercise of certain options granted under our 1999
Stock Option Plan--are also restricted securities and, beginning 90 days after
the effective date of the registration statement of which this prospectus is a
part, may be sold by stockholders, other than our Affiliates subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its one-year holding period requirement.
Registration Rights
We have granted Imperial Bank and Beranson Holdings, Inc. the right to
demand, on four occasions and one occasion, respectively, that we register
their shares of our common stock. In addition, under the terms of the
registration rights agreements, if we propose to register any of our
securities, either for our own account or for the account of another
stockholder exercising registration rights, Imperial Bank and Beranson
Holdings, Inc. are entitled to notice of the registration and are entitled to
include their shares in the registration. Both the demand and the "piggy-back"
registration rights are subject to a number of conditions and limitations,
among them the right of the underwriters of any registration to limit the
number of shares included in the registration. We have agreed to pay the
expenses associated with the registration of Imperial Bank's and Beranson
Holdings,
63
Inc.'s shares of our common stock, including the reasonable cost of legal
counsel, not to exceed $75,000 for each registration.
Options
We intend to file registration statements on Form S-8 under the Securities
Act to register all shares of common stock issuable under our 1999 Stock
Incentive Plan. Shares issued upon the exercise of stock options after the
effective date of the registration statements on Form S-8 will be eligible for
resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above, if
applicable.
Effect of Sales of Shares
Prior to this offering, there has been no public market for our common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares for sale will
have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of our common stock in the
public market could adversely affect the market price of our common stock and
could impair our future ability to raise capital through an offering of our
equity securities.
64
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, CIBC World Markets Corp.
and DLJdirect Inc. have severally agreed to purchase from us the respective
number of shares of common stock set forth opposite their names below.
Number of
Underwriter Shares
Donaldson, Lufkin & Jenrette Securities Corporation.............
CIBC World Markets Corp.........................................
DLJdirect Inc. .................................................
-----
Total.........................................................
=====
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of certain
legal matters and to certain other conditions. The underwriters are obligated
to purchase and accept delivery of all the shares of common stock offered by
this prospectus, other than those shares covered by the over-allotment option
described below, if any are purchased.
The underwriters initially propose to offer the shares of our common stock
in part directly to the public at the initial public offering price set forth
on the cover page of this prospectus and in part to certain dealers, including
the underwriters, at the initial offering price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may re-allow, to
other dealers a concession not in excess of $ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to a total of 750,000 additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise the option solely to cover overallotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to a
number of conditions, to purchase its pro rata portion of such additional
shares based on such underwriter's percentage underwriting commitment as
indicated in the preceding table.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 7.5% of the shares included in the offering, to be
sold to some of our and our shareholders' directors, officers and employees and
family of our and our shareholders' directors and executive officers, to
strategic partners, and to other persons and entities that we believe have
contributed to the development and success of our business. The number of
shares available for sale to the general public will be reduced to the extent
these persons purchase reserved shares. The persons purchasing shares under our
directed share program must commit to purchase shares at the same time as the
general public. Any reserved shares that are not orally confirmed for purchase
65
within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the shares offered in
our initial public offering.
We have agreed to indemnify the underwriters against a number of
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make.
We and each of our executive officers, directors, stockholders and option
holders have agreed, subject to some exceptions, not to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock;
for a period of 180 days after the date of this prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In
addition, during the 180-day period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and certain of our stockholders has agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
our common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. However, Donaldson, Lufkin & Jenrette
Securities Corporation may, in its sole discretion, release all or any portion
of the securities subject to the lock-up agreements. We have determined that if
the lock-up with respect to a significant number of shares has been waived,
whether with respect to a single stockholder or a number of stockholders, we
will review applicable securities laws and, if public disclosure would be
appropriate, disclose the waiver.
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price of the shares of our common
stock offered by this prospectus was determined by negotiation among us and the
representatives of the underwriters. The factors considered in determining the
initial public offering price included the history of and the prospects for the
industry in which we compete, our past and present operations, our historical
results of operations, our prospects for future earnings, the recent market
prices of securities of generally comparable companies and the general
condition of the securities markets at the time of the offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of
any shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of the particular jurisdiction. Persons with this
prospectus should inform themselves about and observe any restrictions relating
to the offering and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of common stock offered hereby in any jurisdiction in which such an offer or a
solicitation is unlawful.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option described above.
Total
-----------------
Per No Full
Share Exercise Exercise
Underwriting fees paid by us............................ $ $ $
66
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and stabilize the price of our
common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members and selected dealers if they repurchase
previously distributed common stock in syndicate covering transactions, in
stabilizing transactions or otherwise. These activities may stabilize or
maintain the market price of our common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end
any of these activities at any time.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Cadwalader, Wickersham & Taft, New
York, New York. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Simpson Thacher & Bartlett, New York, New
York.
EXPERTS
The financial statements of Official Payments Corporation as of December 31,
1997, 1998, for the period from January 1, 1996 to June 26, 1996 of the
predecessor company and for the period from June 26, 1996 (inception) to
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1998 have been included herein and in the Registration Statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission. You should read this prospectus together
with the additional information described in "Where You Can Find Additional
Information" on page 66. The information on our www.8882paytax.com Web site is
not part of this prospectus.
8882paytax.com SM and 1-888-2PAY-TAX SM are registered service marks of
Official Payments Corporation. All other brand names, trademarks and service
marks appearing in this prospectus are the property of their respective
holders.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. You may inspect a copy of
the registration statement without charge at the SEC's principal office in
Washington, D.C. and obtain copies of all or any part thereof upon payment of
certain fees from the Public Reference Section of the SEC at the SEC's
principal office, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
Commission's Regional Offices in New York, located at 7 World Trade Center,
Suite 1300, New York, New York 10048, or in Chicago, located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
SEC's World Wide Web address is www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as we may determine or as
may be required by law.
67
OFFICIAL PAYMENTS CORPORATION
Index to Financial Statements
Page
Independent Auditors' Report............................................. F-2
Balance Sheets as of December 31, 1997, 1998 and September 30, 1999...... F-3
Statements of Operations for the period from January 1, 1996 to June 26,
1996 (predecessor company) and for the period from June 26, 1996
(inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998 and for the nine-month periods ended September 30, 1998
(unaudited) and 1999 (unaudited)........................................ F-4
Statements of Stockholders' Equity (Deficit) for the period from June 26,
1996 (inception) to December 31, 1996 and for the years ended December
31, 1997 and 1998 and for the nine-month period ended September 30, 1999
(unaudited)............................................................. F-5
Statements of Cash Flows for the period from June 26, 1996 (inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 and
for the nine-month periods ended September 30, 1998 (unaudited) and 1999
(unaudited)............................................................. F-6
Notes to Financial Statements............................................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Official Payments Corporation:
We have audited the accompanying balance sheets of Official Payments
Corporation as of December 31, 1997 and 1998 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the period from
January 1, 1996 to June 26, 1996 (predecessor company) and for the period from
June 26, 1996 (inception) to December 31, 1996 and for each of the years in the
two-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Official Payments
Corporation as of December 31, 1997 and 1998, and the results of its operations
and cash flows for the period from January 1, 1996 to June 26, 1996
(predecessor company) and for the period from June 26, 1996 (inception) to
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
San Francisco, California
August 12, 1999, except note 1 and note 8
which is as of October 26, 1999
F-2
OFFICIAL PAYMENTS CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
------------- September 30,
1997 1998 1999
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 182 $ 631 $ 514
Accounts receivable.............................. 265 554 532
Receivable from related parties.................. 12 -- --
Prepaid expenses and other current assets........ 54 29 134
Receivable from U.S. Treasury.................... -- -- 95
----- ------ -------
Total current assets.......................... 513 1,214 1,275
Property and equipment, net....................... 251 533 750
Other assets...................................... -- -- 36
----- ------ -------
Total assets.................................. $ 764 $1,747 $ 2,061
===== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............ $ 404 $ 654 $ 480
Deferred revenue................................. 62 99 107
Current portion of notes payable and capital
lease obligations............................... 268 69 106
Notes payable to related parties................. -- -- 1,632
----- ------ -------
Total current liabilities..................... 734 822 2,325
Notes payable and capital lease obligations....... 121 241 208
Notes payable to related party.................... -- 500 --
----- ------ -------
Total liabilities............................. 855 1,563 2,533
----- ------ -------
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, $0.01 par value; 150,000,000
shares authorized; 15,000,000, shares issued
and outstanding as of December 31, 1997, 1998
and September 30, 1999 (unaudited),
respectively................................... 150 150 150
Additional paid-in capital...................... 428 1,028 42,373
Deferred stock compensation..................... -- -- (40,711)
Accumulated earnings (deficit).................. (669) (994) (2,284)
----- ------ -------
Stockholders' equity (deficit)................ (91) 184 (472)
----- ------ -------
Total liabilities and stockholders' equity
(deficit).................................... $ 764 $1,747 $ 2,061
===== ====== =======
See accompanying notes to financial statements.
F-3
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Period
from
June 26,
1996 Nine months
Period from (Inception) Year ended ended September
January 1, 1996 to December 31, 30,
to December 31, ---------------- ----------------
June 26, 1996 1996 1997 1998 1998 1999
(Predecessor Company) (unaudited)
Revenues:
Transaction fees.................................. $ 111 $ 240 $ 935 $ 2,076 $ 1,286 $ 6,995
Other revenues ................................... 201 234 267 293 148 213
----- ------- ------- ------- ------- -------
Total revenues.................................. 312 474 1,202 2,369 1,434 7,208
Cost of revenues:
Cost of transaction fees.......................... 28 193 412 1,009 593 5,306
Cost of other revenues............................ 40 44 284 71 13 121
----- ------- ------- ------- ------- -------
Total cost of revenues.......................... 68 237 696 1,080 606 5,427
----- ------- ------- ------- ------- -------
Gross profit........................................ 244 237 506 1,289 828 1,781
Operating expenses:
Sales and marketing............................... 107 115 330 356 287 622
Development costs................................. 114 124 206 608 475 648
General and administrative........................ 148 158 446 595 337 1,138
Deferred stock compensation....................... -- -- -- -- -- 516
Allocated expenses from related party............. -- -- 20 -- -- 118
----- ------- ------- ------- ------- -------
Total operating expenses........................ 369 397 1,002 1,559 1,099 3,042
----- ------- ------- ------- ------- -------
Income (loss) from operations....................... (125) (160) (496) (270) (271) (1,261)
Other income (expense), net......................... (31) (7) (6) (55) (37) (29)
----- ------- ------- ------- ------- -------
Net income (loss)............................... $(156) $ (167) $ (502) $ (325) $ (308) $(1,290)
===== ======= ======= ======= ======= =======
Basic and diluted net income (loss) per share....... $ -- $ (0.01) $ (0.03) $ (0.02) $ (0.02) $ (0.09)
===== ======= ======= ======= ======= =======
Shares used in basic and diluted net income (loss)
per share.......................................... -- 15,000 15,000 15,000 15,000 15,000
===== ======= ======= ======= ======= =======
See accompanying notes to financial statements.
F-4
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from June 26, 1996 (inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998 and for the nine-month period ended September 30,
1999 (unaudited)
(In thousands)
Note Total
Common stock Additional Deferred receivable Retained stockholders'
------------- paid-in stock from equity equity
Shares Amount capital compensation stockholder (deficit) (deficit)
Balance as of June 26,
1996 (inception)....... -- $ -- $ -- -- $ -- $ -- $ --
Issuance of common stock
for liabilities
contributed............ 12,000 120 (464) -- -- -- (344)
Issuance of common stock
for cash and note
receivable............. 3,000 30 970 -- (500) -- 500
Net income (loss)....... -- -- -- -- -- (167) (167)
------ ----- ------- -------- ----- ------- ------
Balance as of December
31, 1996............... 15,000 150 506 -- (500) (167) (11)
Distribution of note
receivable to
stockholder............ -- -- (98) -- -- -- (98)
Repayment of note
receivable............. -- -- -- -- 500 -- 500
Services performed by
stockholder............ -- -- 20 -- -- -- 20
Net income (loss) ...... -- -- -- -- -- (502) (502)
------ ----- ------- -------- ----- ------- ------
Balance as of December
31, 1997............... 15,000 150 428 -- -- (669) (91)
Capital contribution.... -- -- 600 -- -- -- 600
Net income (loss) ...... -- -- -- -- -- (325) (325)
------ ----- ------- -------- ----- ------- ------
Balance as of December
31, 1998............... 15,000 150 1,028 -- -- (994) 184
Deferred stock
compensation
(unaudited)............ -- -- 41,227 (41,227) -- -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- 516 -- -- 516
Services performed by
stockholder
(unaudited)............ -- -- 118 -- -- -- 118
Net income (loss)
(unaudited)............ -- -- -- -- -- (1,290) (1,290)
------ ----- ------- -------- ----- ------- ------
Balance as of September
30, 1999 (unaudited)... 15,000 $ 150 $42,373 (40,711) $ -- $(2,284) $ (472)
====== ===== ======= ======== ===== ======= ======
See accompanying notes to financial statements.
F-5
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Period from Year ended Nine months
January 1, 1996 Period from December ended
to June 26, 1996 31, September 30,
June 26, 1996 (Inception) to ------------ --------------
(Predecessor December 31, 1997 1998 1998 1999
Company) 1996
(unaudited)
Cash flows provided by
(used in) operating
activities:
Net income (loss)...... $(156) $(167) $(502) $(325) $(308) $(1,290)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 3 14 29 57 36 132
Deferred stock
compensation......... -- -- -- -- -- 516
Services performed by
related party........ -- -- 20 -- -- 118
Changes in operating
assets and
liabilities:
Accounts receivable.. (51) (76) (101) (289) 143 22
Prepaid expenses and
other assets........ 40 12 (35) 25 (256) (141)
Receivable from U.S.
Treasury............ -- -- -- -- -- (95)
Accounts payable and
accrued expenses.... 4 90 235 250 276 (174)
Deferred revenue..... (74) (64) 31 37 11 8
----- ----- ----- ----- ----- -------
Net cash provided by
(used in) operating
activities......... (234) (191) (323) (245) (98) (904)
----- ----- ----- ----- ----- -------
Cash flows provided by
(used in) investing
activities--capital
expenditures........... (43) (63) (139) (298) (148) (255)
----- ----- ----- ----- ----- -------
Cash flows provided by
(used in) financing
activities:
Issuance of common
stock................. -- 500 -- -- -- --
Capital contribution .. -- -- -- 600 -- --
Repayment of notes
payable and capital
leases................ 119 (38) (77) (108) (75) (90)
Repayment of note
receivable from
stockholder........... -- -- 500 -- -- --
Notes payable to
related party......... -- -- -- 500 500 1,132
----- ----- ----- ----- ----- -------
Net cash provided by
(used in) financing
activities......... 119 462 423 992 425 1,042
----- ----- ----- ----- ----- -------
(Decrease) increase in
cash and cash
equivalents............ (158) 208 (39) 449 179 (117)
Cash and cash
equivalents at
beginning of period.... 171 13 221 182 182 631
----- ----- ----- ----- ----- -------
Cash and cash
equivalents at end of
period................. $ 13 $ 221 $ 182 $ 631 $ 361 $ 514
===== ===== ===== ===== ===== =======
Supplemental disclosure
of noncash activity:
Net liabilities
contributed........... $ -- $ 384 $ -- $ -- $ -- $ --
Assets acquired through
capital leases........ $ -- $ -- $ -- $ 41 $ 3 $ 94
===== ===== ===== ===== ===== =======
See accompanying notes to financial statements.
F-6
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and September 30, 1999 (unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) The Company
Official Payments Corporation (the Company) was formed as U.S. Audiotex, LLC
a California limited liability company (the "LLC"), on June 26, 1996. U.S.
Audiotex Corporation, a Delaware corporation (the "Corporation"), was formed on
August 24, 1999. Effective September 30, 1999, the LLC merged with and into the
Corporation. On October 20, 1999, the Company changed its name to Official
Payments Corporation. The Company provides credit card payment options for
consumers to pay personal federal and state income taxes, sales and use taxes,
property taxes and fines for traffic violations and parking citations.
On June 26, 1996, Beranson Holdings, Inc., (the Predecessor) a company
wholly owned by the Company's president, contributed net liabilities of
$344,000 to the Company in exchange for an 80% interest in the Company. These
assets and liabilities were recorded at the historical basis of the
Predecessor. The Predecessor also had a business which collected revenues from
interactive voice response classified advertisements. The formation of the
Company excluded this operation of the Predecessor so revenues and net loss
from this business activity totaling $752,000 and $14,000, respectively for the
year ended December 31, 1996 have not been included in the financial statements
of the Company. The activities of Beranson Holdings, Inc. for the first six
months of 1996 related to the credit card payment business have been presented
in the financial statements of the Company.
(b) Unaudited Interim Financial Information
The financial information for nine months ended September 30, 1998 and 1999
is unaudited, but includes all adjustments (consisting only of normal recurring
adjustments and deferred stock compensation) which the Company considers
necessary for the fair presentation of the financial position at such dates and
the operations and cash flows for the periods then ended. Operating results for
the nine months ended September 30, 1999 are unaudited, and are not necessarily
indicative of results which may be expected for the entire year.
(c) Cash and Cash Equivalents
The company considers cash on hand, deposits in bank, certificates of
deposits, and short-term marketable securities with original maturities of less
than 90 days to be cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets. The Company has determined the estimated useful
lives of their assets to be three years for computer equipment and five years
for furniture and fixtures.
(e) Revenue Recognition
Transaction fees are derived from convenience fees paid by consumers for
credit card payment services provided by the Company. Convenience fees are
charged based on the amount of the payment processed and the type of payment.
Transaction fees are recognized in the month the services are provided.
Other revenues consists of the sale of customized systems which include
software licenses, implementation services, training and post contract support
related to these system sales. As vendor specific objective evidence does not
exist for each element of the contract, revenues are recognized upon customer
acceptance of the
F-7
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and September 30, 1999 (unaudited)
software which occurs after installation of the system and the completion of
training. Maintenance revenues are deferred based on vendor specific objective
evidence and recognized ratably over the contractual term of the maintenance
agreement, generally one year.
(f) Development Costs
Development costs associated with new products and enhancements to existing
software products are expensed as incurred until technological feasibility is
established upon completion of a working model. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility, and, accordingly, $200,000 has been capitalized. The
Company amortizes this cost on a straight line basis over an estimated useful
life of three years, which is determined to be the greater of the amount
computed using the straight-line method and the ratio that current gross
revenues from the capitalized software bear to current and anticipated future
revenues from the capitalized software.
(g) Concentration of Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company performs ongoing credit evaluations of its clients and generally does
not require collateral. Uncollectible accounts have been insignificant to date.
The Company had one customer that accounted for 22% of accounts receivable at
December 31, 1997 and none that account for greater than 10% of accounts
receivable at December 31, 1998 and September 30, 1999 (unaudited).
In the nine-month period ended September 30, 1999 transaction fees from IRS
payments accounted for 60% of total revenues (unaudited). The Company's
agreement with the IRS covers credit card payments for 1998 tax returns filed
during the 1999 filing season. The agreement was renewed for an additional one-
year period by mutual consent of both parties.
In April 1999 certain payments to the U.S. Treasury were duplicated which
resulted in an overpayment totaling $440,000. In August 1999, the Internal
Revenue Service acknowledged this overpayment and has agreed to reimburse the
Company for the full overpayment. During September 1999, the Internal Revenue
Service reimbursed the Company approximately $345,000 of this payment.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Fair Value of Financial Instruments
The fair values of the Company's cash, cash equivalents, accounts
receivable, accounts payable approximate their carrying values due to their
short maturity. The fair value of amounts due to related parties is not readily
determinable.
F-8
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and September 30, 1999 (unaudited)
(j) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost to sell.
(k) Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
shares of options and warrants to purchase common stock using the treasury
stock method. Diluted net income (loss) per share is computed using the
weighted-average number of shares of common stock and, when dilutive, potential
shares of options and warrants to purchase common stock using the treasury
stock method outstanding.
(l) Comprehensive Income (Loss)
The Company has no components of other comprehensive income (loss), and
accordingly, the comprehensive income (loss) is the same as net income (loss)
for all periods presented.
(m) Recent Accounting Pronouncements
The FASB recently issued Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 by July
1, 2001. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position of the Company.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98--1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use or SOP 98-1. SOP 98-1 establishes the accounting for
costs of software products developed or purchased for internal use, including
when such costs should be capitalized. The adoption of SOP 98-1 in 1998 did not
have a material affect on our financial position or results of operations.
(n) Advertising Expense
The cost of advertising is expensed as incurred. Such costs are included in
selling and marketing expense and totaled approximately $6,000, $28,000,
$28,000 and $63,000 for the years ended December 31, 1996, 1997, 1998 and the
nine-month period ended September 30, 1999 (unaudited).
(o) Stock Compensation
The Company uses the intrinsic-value method to account for all of its
employee stock compensation plans. Expense associated with stock compensation
is being amortized on a straight-line basis over the vesting period of the
individual awards.
F-9
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and September 30, 1999 (unaudited)
(2) Related Party Transactions
Notes receivable (payable) from/to related parties is as follows:
December 31,
-------------- September 30,
1997 1998 1999
(unaudited)
(In thousands)
Advances to an officer..................... $ 11 $ -- $ --
Amount due from Beranson Holdings, Inc..... 1 -- --
Note payable to stockholders............... -- (500) (1,632)
----- ------- -------
$ 12 $ (500) $(1,632)
===== ======= =======
On June 26 1996 the net liabilities (see footnote 1) contributed by the
Predecessor included a note receivable of $98,000 from Kenneth Stern, the sole
shareholder of the Predecessor. In 1997 the note was distributed to Kenneth
Stern and the Company recorded a distribution to stockholders of $98,000.
During the period from June 26, 1996 to December 31, 1996 the Company
allocated approximately $16,000 of its general and administrative expenses to
Beranson Holdings, Inc.
Imperial Bank and Beranson Holdings, Inc., a company affiliated with our
President, have from time to time made advances to fund certain capital
expenditures. These advances are evidenced by promissory notes bearing interest
at a floating rate equal to Imperial Bank's prime rate (7.75% as of June 30,
1999) plus 2% per annum. Principal and accrued interest of approximately
$558,000 was repaid by the Company on August 24, 1998 and was refinanced with
new notes to stockholder due December 31, 2000.
Imperial Bank is one of 3 merchant banks used to process credit card
transactions and perform traditional merchant credit card settlement services
for the Company. The Company's agreement with Imperial Bank does not prohibit
it from utilizing other merchants and is cancellable by the Company upon 30
days notice. During the nine months ended September 30, 1999, for performing
these charges the Company paid Imperial Bank approximately $1.6 million for
performing these merchant discount fees.
Imperial Bank provides administrative and financial services to the Company.
The Company reimburses Imperial Bank for these services to the extent they
represent ongoing activities such as human resources, payroll processing and
employee benefits administration. During the nine months ended September 30,
1999, the Company incurred approximately $7,000 for these services (unaudited).
To the extent that Imperial Bank provides services for activities that are not
paid for by the Company, the Company's allocated cost is recorded as expense
and as a contribution of capital. For the year ended December 31, 1997 and for
the nine months ended September 30, 1999 (unaudited), the Company recorded
$20,000 and $118,000 respectively for these services. No such services were
received by the Company or performed on behalf of the Company for all other
periods presented.
In April 1999, the Company received an intercompany advance of $440,000 from
Imperial Bank to assist in its working capital needs. This amount was repaid by
the Company in August, 1999.
In June 1999, the stockholders of the Company agreed to loan the Company
$2.8 million in working capital which is payable on the earlier of the date
that is 30 days following the IPO date or December 31,
F-10
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and September 30, 1999 (unaudited)
2000. Through September 30, 1999 (unaudited), the Company received advances of
approximately $1.6 million from the stockholders which bears interest at 2%
above prime and which will be repaid from the proceeds of the Company's
initial public offering.
(3) Property and Equipment
Property and equipment are summarized as follows:
December 31, September 30,
------------- 1999
1997 1998 (unaudited)
(In thousands)
Computer equipment........................... $ 456 $ 768 $1,019
Furniture and fixtures....................... 38 66 164
------ ------ ------
494 834 1,183
Less accumulated depreciation and
amortization................................ 243 301 433
------ ------ ------
$ 251 $ 533 $ 750
====== ====== ======
Property and equipment recorded under capital leases was approximately
$24,000, $64,000 and $158,000 as of December 31, 1997, 1998 and September 30,
1999 (unaudited), respectively, with related accumulated amortization of
approximately $11,000, $20,000 and $38,000, respectively.
(4) Debt and other commitments
The Company has a credit facility with a third party bank which consists of
a $500,000 line of credit and a term loan due May 2001 with an original
principal amount of $250,000. The borrowings bear interest at the bank's prime
rate of 7.75% as of December 31, 1998 plus 1.50%. The Company also leases
certain equipment under capital leases, extending through 2000.
Notes payable were as follows:
December 31, September 30,
------------- 1999
1997 1998 (unaudited)
(In thousands)
Line of credit............................... $ 208 $ 151 $ 119
Term loan.................................... 171 121 83
Capital lease obligation..................... 10 38 113
------ ------ ------
389 310 315
Less current portion......................... 268 69 106
------ ------ ------
Long-term notes payable...................... $ 121 $ 241 $ 209
====== ====== ======
The Company leases its facility and certain equipment under operating
leases, extending through 1999.
The Company is in compliance with all financial covenants under this debt
and other commitments as of December 31, 1998.
F-11
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and September 30, 1999 (unaudited)
Future minimum debt and capital leases payments as of September 30, 1999
were as follows (in thousands) (unaudited):
1999................................................................ $ 40
2000................................................................ 153
2001................................................................ 113
2002 and thereafter................................................. 20
----
Total future minimum debt and capital leases payments............. $326
====
Future minimum lease payments under noncancelable operating leases as of
September 30, 1999 were as follows (in thousands) (unaudited):
Years ending December 31:
1999................................................................ $ 98
2000................................................................ 194
2001................................................................ 199
2002................................................................ 203
2003................................................................ 207
----
Total future minimum lease payments under operating leases........ $901
====
Rental expense under operating leases for the years ended December 31, 1997
and 1998 was $64,000 and $75,000, respectively.
(5) Stockholders' Equity (Deficit)
On January 23, 1998, Imperial Bank purchased 9 million shares of common
stock or 75% of the Predecessor's 12 million shares of common stock in the
Company for $3,010,000. In addition, Imperial Ventures, a wholly owned
subsidiary of Imperial Bank, transferred its 3 million shares of common stock
in the Company to Imperial Bank.
As of December 31, 1998, Imperial Bank and the Predecessor are the holders
of 80% and 20% of the Company's common stock, respectively.
(6) Income Taxes
As of December 31, 1998 the Company had no federal or Californian net
operating loss carryforwards. As of December 31, 1998 the Company has no
federal or Californian research and development credit carryforwards for tax
purposes. All tax operating losses to date have been used by the members of
U.S. Audiotex, LLC on their personal tax returns.
(7) Segment Information
The Company has adopted the provisions of SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining which information to report is based on
the way that management organizes the operating segments within the Company for
making operating decisions and assessing financial performance.
F-12
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and September 30, 1999 (unaudited)
The Company's chief operating decision-maker is considered to be the
Company's President. The President reviews financial information by
disaggregated information about revenues by product for purposes of making
operating decisions and assessing financial performance. The financial
information reviewed by the President is consistent with the information
presented in the accompanying statements of operations. Therefore, the Company
operates in a single operating segment.
Period from
January 1, 1996 Period from
to June 26, 1996 Nine months ended
June 26, 1996 (Inception) to Year ended September 30,
(Predecessor December 31, ------------- -----------------
Company) 1996 1997 1998 1998 1999
(unaudited)
(In thousands)
Revenues by product are:
Transaction fees:
Federal income tax........................................ $-- $-- $ -- $ -- $ -- $ 4,342
Moving violations......................................... 101 160 446 827 580 888
Parking citations......................................... -- 13 105 157 115 206
Property taxes............................................ -- 7 178 765 356 954
State income taxes........................................ -- -- -- -- -- 291
Fax filing................................................ 10 33 120 192 140 165
Service bureau-utilities.................................. -- 27 86 135 95 149
Other revenues:
System sales.............................................. 159 204 166 115 15 105
Maintenance & consulting.................................. 42 30 101 178 133 108
- -------------------------------------------------- ---- ---- ------ ------ -------- --------
Total revenues............................................. $312 $474 $1,202 $2,369 $==1,434 $==7,208
No single customer accounted for greater than 10% of revenues in any period
reported.
(8) Subsequent Events
(a) Recapitalization
On August 24, 1999, the Company issued 2,400 shares of common stock to
Imperial Bank for an aggregate consideration of $8.00 and 600 shares of common
stock to Beranson Holdings, Inc. for an aggregate consideration of $2.00. In
connection with the merger of U.S. Audiotex, LLC into U.S. Audiotex
Corporation, a Delaware Corporation, the limited liability company interests of
Imperial Bank and Beranson Holdings in U.S. Audiotex, LLC were exchanged for
11,997,600 and 2,999,400 shares of the Company's common stock, respectively.
Share information has been restated for all periods presented.
(b) Initial Public Offering (Unaudited)
On September 15, 1999, our Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
us to sell shares of our common stock in connection with a proposed IPO.
(c) Stock Incentive Plan
The Board of Directors adopted the 1999 Stock Incentive Plan (the Incentive
Plan) on August 24, 1999. The Incentive Plan provides for the grant of
nonstatutory stock options to employees or outside directors. A total of
6,900,000 shares of our common stock are reserved for issuance under the
Incentive Plan, 900,000 of which are available for grants to outside directors.
F-13
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and September 30, 1999 (unaudited)
Options granted under the Incentive Plan may be designated as qualified or
nonqualified at the discretion of our Board of Directors, with exercise prices
for incentive stock options of not less than the fair value of the underlying
stock at the date of grant. Options granted under the plan vest annually over a
maximum five year period and expire ten years from the date of grant.
The Company uses the intrinsic value method to account for the Incentive
Plan. Accordingly, compensation cost is recognized for stock options when, on
the date of grant, the current market value of the underlying common stock
exceeds the exercise price of the stock options at the date of grant. In the
nine-month period ended September 30, 1999, the Company recorded deferred
compensation expense of approximately $41 million for options granted to
employees to purchase approximately 4,488,000 shares of our common stock at an
exercise price of $1.33 per share.
(d) Stock Split
On October 26, 1999 our Board of Directors authorized a 3 for 1 split of all
of the outstanding shares of the Company's common stock which will be effective
prior to the completion of the Company's initial public offering. Shares and
per share number information has been restated for all periods presented to
give effect to this stock split.
(e) Significant Employment Agreements
In August 1999, the Company entered into an employment agreement with Thomas
R. Evans, the Chairman and Chief Executive Officer. The employment agreement as
amended as of September 14, 1999 provides for an annual base salary of $200,000
and a one-time bonus of $500,000. Mr. Evans was granted options to purchase
1,325,460 shares of common stock at $1.33 per share. The Company may exercise
this right at any time during the 30-day period following Mr. Evans'
termination of employment for reasons other than death, disability or a change
in control. The Company's repurchase right will expire with respect to one-
third of the 1,325,460 option shares on the first anniversary of the grant
date. Thereafter, the Company's right will expire on a cumulative basis with
respect to 29,763 shares per month on the last day of each of the next 24
consecutive months. Further, upon completion of this offering, the Company will
grant Mr. Evans an additional option to acquire shares of the Company's common
stock at an exercise price of $1.33 per share so that, when combined with the
option described above, Mr. Evans will have options to acquire such number of
shares of the Company's common stock as is equal to an aggregate of five
percent (5%) of the Company's common stock outstanding at that time, on a fully
diluted basis (including the options granted to Mr. Evans).
Under the terms of the employment agreement, Imperial Bank has guaranteed
that the value (as defined in the agreement) of Mr. Evans' 1,325,460 options
will be worth $10,000,000 based upon the number of options vested on or before
the third anniversary of the date of the agreement, or Imperial Bank will pay
Mr. Evans an amount equal to the difference between $10,000,000 and the highest
value of the vested options on or before the third anniversary. As part of the
$41 million in deferred stock compensation recorded by the Company in the nine-
month period ended September 30, 1999 (unaudited) the Company recorded $10
million of deferred stock compensation based upon this guarantee. This $10
million of deferred stock compensation is being amortized on a straight-line
basis over the vesting period of the options which is 36 months.
In August 1999, the Company entered into an employment agreement with
Kenneth Stern, pursuant to which Mr. Stern has agreed to serve as the Company's
President and a member of the board of directors until August 23, 2006. The
employment agreement provides for an annual base salary of $215,000 and a
minimum annual bonus of $100,000. Mr. Stern has the right to take early
retirement at any time after the third anniversary of the date of the
agreement, upon which the Company would be required to pay him his base salary
and bonus through August 23, 2006.
F-14
[OFFICIAL PAYMENTS Logo]
5,000,000 Shares of common stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
CIBC World Markets
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representation as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of U.S.
Audiotex Corporation have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses in connection with this
Registration Statement. The Company will pay all expenses of the offering. All
of such expenses are estimates, other than the filing fees payable to the
Securities and Exchange Commission, National Association of Securities Dealers,
Inc. ("NASD") and the Nasdaq National Market.
Securities and Exchange Commission Filing Fee................... $23,978
NASD Filing Fee................................................. 6,500
Nasdaq National Market Listing Fee.............................. *
Printing Fees and Expenses...................................... *
Legal Fees and Expenses......................................... *
Accounting Fees and Expenses.................................... *
Blue Sky Fees and Expenses...................................... *
Miscellaneous................................................... *
-------
Total......................................................... $ *
=======
- --------
* To be completed in an amendment.
Item 14. Indemnification of Directors and Officers
Subsection (a) of Section 145 of the General Corporation Law of Delaware
(the "DGCL") empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
complete action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification may be
made in respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that despite the adjudication of liability such person
is fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director,
officer, employee or agent of a corporation has been successful in the defense
of any action, suit or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith; that indemnification or advancement of expenses
provided for by Section 145 shall not be deemed exclusive of any
II-1
other rights to which the indemnified party may be entitled; and empowers the
corporation to purchase and maintain insurance on behalf of a director,
officer, employee or agent of the corporation against any liability asserted
against him or incurred by him in any such capacity or arising out of his
status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Our certificate of incorporation provides that no director, or person
serving on a committee of the board of directors, shall be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the DGCL; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we must indemnify our directors, officers and
employees against any liability incurred in connection with any proceeding in
which they may be involved as a party or otherwise, by reason of the fact that
he or she is or was a director, officer, employee, or agent of us, or is or
was serving at our request as a director, officer, employee, agent, fiduciary
or trustee of another corporation, partnership, joint venture, trust, employee
benefit plan, or other entity or enterprise, except:
. to the extent that such indemnification against a particular liability
is expressly prohibited by applicable law;
. for a breach of such person's duty of loyalty to us or our stockholders;
. for acts or omission not in good faith;
. for intentional misconduct or a knowing violation of law; or
. for any transaction resulting in receipt by such person of an improper
personal benefit.
Such indemnification may include advances of expenses prior to the final
disposition of such proceeding.
Item 15. Recent Sales of Unregistered Securities
On August 24, 1999, we issued 2,400 shares of our common stock to Imperial
Bank for an aggregate consideration of $8.00 and 600 shares of common stock to
Beranson Holdings, Inc. for an aggregate consideration of $2.00. We relied on
the exemption under Section 4(2) of the Securities Act of 1933, as amended,
because it was an offer made by an issuer not involving a public offering. In
connection with the merger of U.S. Audiotex, LLC into us, which merger we
effected as of September 30, 1999, the limited liability company interests of
Imperial Bank and Beranson Holdings, Inc. in U.S. Audiotex, LLC were exchanged
for 11,997,600 and 2,999,400 shares of our common stock, respectively. The
merger was an internal corporate reorganization solely involving the existing
members of U.S. Audiotex, LLC in order to convert our corporate form into a C
corporation in anticipation of this initial public offering.
II-2
Item 16. Exhibits and Financial Statement Schedule
(a) Exhibits.
Exhibit
No. Description
------- -----------
1.1 --Form of Underwriting Agreement.**
2.1 --Merger Agreement, dated as of September 24, 1999, between U.S.
Audiotex, LLC and U.S. Audiotex Corporation.
3.1 --Certificate of Incorporation of the Registrant.*
3.1.1 --Amended Certificate of Incorporation of the Registrant.
3.2 --Bylaws of the Registrant.*
4.1 --Common Stock Specimen.**
5.1 --Opinion of Cadwalader, Wickersham & Taft.**
10.1 --Amended Employment Agreement, dated as of September 14, 1999, by and
among U.S. Audiotex Corporation, Imperial Bank and Thomas R. Evans.*
10.2 --Employment Agreement, dated August 24, 1999, between U.S. Audiotex
Corporation and Kenneth Stern.*
10.3 --1999 Stock Incentive Plan.*
10.4 --Stockholders Agreement, dated August 24, 1999, by and among U.S.
Audiotex Corporation, U.S. Audiotex, Inc. and Imperial Bank.*
10.5 --Electronic Tax Administration Memorandum of Agreement between the
Internal Revenue Service and U.S. Audiotex, LLC.*
10.5.1 --Electronic Tax Administration Memorandum of Agreement Between the
Internal Revenue Service and U.S. Audiotex Corporation, dated October
4, 1999.
10.6 --Contract between U.S. Audiotex, LLC and the Office of the Chief
Financial Officer of the District of Columbia with an award date of
December 22, 1998.
10.7 --Term contract between the New Jersey Division of Purchase and
Property and U.S. Audiotex, LLC, together with related Response to
Request for Proposal.
10.8 --Subcontract with the Novus Services, Inc., dated November 30, 1998,
of the IVR Services agreement with the California Franchise Board.
10.9 --Processing Agreement, dated as of July 16, 1995, by and between
Imperial Bank and U.S. Audiotex LLC.
10.10 --Contract with the Internal Revenue Service for Integrated Electronic
Filing and Payment of Individual Income Tax by Credit Card, dated
September 30, 1999.**
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit
5.1).**
23.2 --Consent of KPMG LLP.
24.1 --Power of Attorney (included on signature page).
27.1 --Financial Data Schedule.
99.1 --Consent of George L. Graziadio
99.2 --Consent of Lee E. Mikles
99.3 --Consent of Bruce Nelson
99.4 --Consent of Christos Cotsakos
99.5 --Consent of Andrew Cohan
99.6 --Consent of Vernon Loucks
- --------
* Previously Filed
** To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is
II-3
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Ramon, State of
California, on October 26, 1999.
U.S. AUDIOTEX CORPORATION
By: /s/ Thomas R. Evans
----------------------------------
Thomas R. Evans
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas R. Evans and Brian W. Nocco, and each of
them, such person's true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform such and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on October 26, 1999
Signature Title
/s/ Thomas R. Evans
- -------------------------------------
Thomas R. Evans Chairman and Chief Executive Officer
and
a director
(principal executive officer)
/s/ Brian W. Nocco
- -------------------------------------
Chief Financial Officer and a
Brian W. Nocco director
(principal accounting officer)
/s/ Kenneth Stern
- ------------------------------------- President and a director
Kenneth Stern
II-5
Exhibit
No. Description Page
------- ----------- ----
1.1 --Form of Underwriting Agreement.**
2.1 --Merger Agreement, dated as of September 24, 1999, between
U.S. Audiotex, LLC and U.S. Audiotex Corporation.
3.1 --Certificate of Incorporation of the Registrant.*
3.1.1 --Amended Certificate of Incorporation of the Registrant.
3.2 --Bylaws of the Registrant.*
4.1 --Common Stock Specimen.**
5.1 --Opinion of Cadwalader, Wickersham & Taft.**
10.1 --Amended Employment Agreement, dated as of September 14, 1999,
by and among U.S. Audiotex Corporation, Imperial Bank and
Thomas R. Evans.*
10.2 --Employment Agreement, dated August 24, 1999, between U.S.
Audiotex Corporation and Kenneth Stern.*
10.3 --1999 Stock Incentive Plan.*
10.4 --Stockholders Agreement, dated August 24, 1999, by and among
U.S. Audiotex Corporation, U.S. Audiotex, Inc. and Imperial
Bank.*
10.5 --Electronic Tax Administration Memorandum of Agreement between
the Internal Revenue Service and U.S. Audiotex, LLC.*
10.5.1 --Electronic Tax Administration Memorandum of Agreement Between
the Internal Revenue Service and U.S. Audiotex Corporation,
dated October 4, 1999.
10.6 --Contract between U.S. Audiotex, LLC and the Office of the
Chief Financial Officer of the District of Columbia with an
award date of December 22, 1998.
10.7 --Term contract between the New Jersey Division of Purchase and
Property and U.S. Audiotex, LLC, together with related
Response to Request for Proposal.
10.8 --Subcontract with the Novus Services, Inc., dated November 30,
1998, of the IVR Services agreement with the California
Franchise Board.
10.9 --Processing Agreement, dated as of July 16, 1995, by and
between Imperial Bank and U.S. Audiotex LLC.
10.10 --Contract with the Internal Revenue Service for Integrated
Electronic Filing and Payment of Individual Income Tax by
Credit Card, dated September 30, 1999.**
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit
5.1).**
23.2 --Consent of KPMG LLP.
24.1 --Power of Attorney (included on signature page).
27.1 --Financial Data Schedule.
99.1 --Consent of George L. Graziadio
99.2 --Consent of Lee E. Mikles
99.3 --Consent of Bruce Nelson
99.4 --Consent of Christos Cotsakos
99.5 --Consent of Andrew Cohan
99.6 --Consent of Vernon Loucks
- --------
* Previously Filed
** To be filed by amendment.